Introduction:
• Project Cost Management is the knowledge use for
managing costs. Processes in this area help to
ensure a project is completed within the approved
budget
• It includes the processes involving in estimating,
budgeting and controlling costs.
• These processes interact with each other and with
processes in the other knowledge areas as well
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Estimate
Costs
Determine
Budget
Control Costs
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Definitions:
1. Estimate Costs-The process of developing an approximation of
the monetary resources needed to complete project activates.
2. Determining Budget-The process of aggregating the estimated
costs of individual activates or work packages to establish an
authorized cost baseline.
3. Control Costs: The process on monitoring the status of the
project to update the project budget and managing changes to
the cost baseline.
Each process has specified:
1) Inputs,
2) Tools / Techniques
3) Outputs
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Estimate Cost:
7.1 Estimate Cost
Inputs
7.2 Determine Budget
7.3 Control Cost
Tools & Techniques
Out puts
•Scope baseline.
•Expert judgment.
•Activity cost estimates.
•Project schedule.
•Analogous estimating.
•Basis of estimates.
•Human Resource plan.
•Parametric estimating.
•Risk register.
•Bottom-Up estimating.
•Project document
updates.
•Enterprise environmental
factors.
•Three –point estimates.
•Organizational process
assets.
•Cost of quality.
•Reserve analysis.
•Project management
estimating software.
•Vendor bid analysis.
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Estimate Cost:
Inputs
Scope baseline
The scope baseline is the approved project scope statement, WBS,
and WBS dictionary. These collectively provide the deliverables,
statements of work, constraints, and assumptions that are
necessary for accurate cost estimating.
Project schedule
The project schedule specifies the planned start and finish date for
each scheduled activity.
Human resource plan
The human resource plan contains details regarding the how the
project will be staffed and the labor rates for estimating costs
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Estimate Cost:
Inputs
Enterprise environmental factors
Factors beyond the project’s boundaries impact costs, including
marketplace conditions and the pool of available suppliers.
Organizational process assets
Lessons learned, project files, and historical information from the
organization are crucial for good estimates.
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Estimate Cost:
Tools & Techniques
Expert judgment, relies on historical experience to assess and
adjust estimates.
Analogous estimating uses the costs from similar projects or
activities as the basis for the current project.
Parametric estimating uses mathematical formulas to derive
estimates.
Bottom-up estimating decomposes activities to the lowest level
possible for cost estimating purposes, and then aggregates
component costs back up to a summary activity level
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Estimate Cost:
Tools & Techniques
Three-point estimates (PERT analysis), help to remove the
uncertainty from estimates by providing a weighted average using
the pessimistic, optimistic, and most-likely values. The Formula:
(Optimistic Estimate + (4 x Most-Likely Estimate ) + Pessimistic Estimate)
6
Example:
Optimistic
$75
Most Likely
$100
Pessimistic
$150
Three-point estimate = ($75 + (4 x $100) + $150) / 6
Three-point estimate = $104.17
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Estimate Cost:
Outputs
Activity cost estimates , are a complete accounting of all
component costs, such as labor, resources, services, fees,
licenses, of a scheduled activity.
Basis of estimates, is the supporting detail to the activity cost
estimates including the references for cost estimate, considered
assumptions, constraints, range of accuracy, and the confidence
level in the estimate.
Project document updates, the process of estimating costs can
result in updates to several project documents, including the WBS,
and the WBS dictionary.
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Determine Budget:
7.1 Estimate Cost
Inputs
7.2 Determine Budget
Tools & Techniques
•Activity cost estimates.
•Cost aggregation.
•Basis of estimates.
•Reserve analysis.
•Scope baseline.
•Expert judgment.
•Project schedule.
•Historical relationships.
•Resource calendars.
•Funding limit
reconciliation.
•Contracts.
7.3 Control Cost
Out puts
•Cost performance
baseline.
•Project funding
requirements.
•Project document
updates.
•Organizational process
assets.
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Determine Budget:
Tools & Techniques
Cost aggregation, Individual costs are aggregated in many
different ways for budgeting purposes, including at the work
package, deliverable, summary activity, or other classification
levels.
Reserve analysis , are time or cost buffers in the project schedule
or budget that help the project respond to uncertainties
Expert judgment, is based upon the experience and knowledge of
subject matter experts.
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Determine Budget:
Tools & Techniques
Historical relationships, refers to the characteristics of the current
and past projects that can be used to develop models that aid in
budgeting.
Funding limit reconciliation, matches the project's planned need
for funding with the organization's ability to provide that funding
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Determine Budget:
Outputs
Cost performance baseline is a time-phased budget that is used
for project cost management, monitoring, and reporting. It is
commonly shown as an S-curve graph.
Project funding requirements, refers to the entire estimated cost
of the budget, including any contingency or management
reserves.
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Determine Budget:
Cost performance baseline
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Control Costs:
7.1 Estimate Cost
Inputs
7.2 Determine Budget
7.3 Control Cost
Tools & Techniques
Out puts
•Project management
plan.
•Earned value
management.
•Work performance
measurement.
•Project funding
requirements.
•Forecasting.
•Budget forecasts.
•To – complete
performance index.
•Organizational process
assets update change
requests.
•Work performance
information.
•Organizational process
assets.
•Performance reviews.
•Variance analysis.
•Project management
software.
•Project management
plan updates project
document updates.
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Control Costs:
Inputs
Project management plan , includes the cost management plan
which describes how project costs will be managed, reported on,
and controlled. The cost performance baseline is also part of the
project management plan, and it’s used to compare actual costs to
planned costs.
Project funding requirements, refers to the entire estimated cost
of the budget, including any contingency or management reserves.
It’s used to compare actual costs to planned costs.
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Control Costs:
Inputs
Work performance information , is any data that related to the
work which produces the project deliverables. Examples are
schedule and progress status information, budget and cost status,
quality status, estimates to complete, resource utilization
information, and lessons learned.
Organizational process assets , are the source of existing policies,
processes, organizational data and knowledge. The organization
may have cost-related policies, procedures, and reporting
methods that must be followed.
.
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Control Costs:
Tools & Techniques
Earned value management, measures the performance of the
project. It also provides a way to forecast future performance
based on what's happened so far with the project.
Forecasting, involves predicting future performance based on
historical work performance information and expert judgment.
To-complete performance index (TCPI), is a formula that provides
the level of performance that must be achieved to meet either the
budget at completion (BAC) or the estimate at completion (EAC).
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Control Costs:
Tools & Techniques
Performance reviews, are assessments that analyze the project’s
historical cost performance. It includes earned value
measurements, variance analysis, and trend analysis.
Variance analysis, compares expected cost performance to what
is actually occurring, and determines the causes of any variance
uncovered.
Project management software, automated tools can help in
monitoring, tracking, and reporting on earned value
measurements.
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Control Costs:
Outputs
Work performance measurements includes work performance
information that specifically provides mathematical measurements
of performance that is communicated to stakeholders. It may also
report on earned value values for WBS components or control
accounts within the WBS.
Budget forecasts on the project’s expected completion cost and
variances is documented and provided to stakeholders throughout
the project.
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Control Costs:
Outputs
Organizational process assets updates for the lessons learned,
corrective actions taken and the reasons, and the causes of
financial variances.
Change requests to the cost baseline as required
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Control Costs Formulas:
Acronym
Name
Formula
AC
Actual Cost
AC = actual cost of the
project up to the
measurement period
BAC
Budget at Completion
BAC = total budgeted
cost of the project
EV
Earned Value
EV = Actual % complete x
BAC
PV
Planned Value
PV = Planned % complete
x BAC
CV
Cost Variance
CV = EV - AC
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Control Costs Formulas:
Acronym
Name
Formula
SV
Schedule Variance
SV = EV - PV
CPI
Cost Performance Index
CPI = EV / AC
SPI
Schedule Performance Index
SPI = EV / PV
EAC
Estimate at Completion
EAC = BAC / CPI
ETC
Estimate to Complete
ETC = EAC - AC
VAR
Variance at Completion
VAR = BAC - EAC
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Control Costs Formulas:
Example:
Planned work complete = 80%
Actual work complete = 75%
(BAC) =
1,000,000
4-month project
M1
M2
M3
M4
•4-month project: Total budget $1,000,000 = Budget at completion (BAC)
•Project cost at end of month three: $950,000 = Actual cost (AC)
•Estimated work complete at end of month three: 80%
•Actual work complete at end month three: 75%
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Control Costs Formulas:
Planned value
PV = Planned % Complete x BAC
PV = 80% x $1,000,000 = $800,000
Earned value
EV = Actual % Complete x BAC
EV = 75% x $1000,000 = $750,500
Planned Value (PV) is how
much work was expected
to be completed
Earned Value (EV) is how
much work has actually
been completed
Cost variance
CV = EV – AC
CV = $750,000 - $950,000 = -$200,000
Cost Variance (CV) is how
the cost of the project is
comparing to the value of
work completed
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Control Costs Formulas:
Cost performance index
CPI = EV / AC
CPI = $750,500 / $950,000 = 0.79
Cost Performance Index
(CPI) shows how much
work is being completed
for every unit of cost
spent (Output/Input)
For every $1 input (cost) , we are earning only $0.8 in work output
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Control Costs Formulas:
Schedule performance index
SPI = EV / PV
SPI = $750,500 / $800,000 = 0.94
Schedule Performance
Index (SPI) shows how
close the actual
completed work
compared to the
schedule
For every hour we planned , we are completing only 0.94 hours.
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Control Costs Formulas:
Estimate at completion
EAC = BAC / CPI
EAC = $1000,000 / 0.94 = $1,063,829
Based on current performance, the project
will be completed at cost = $1,063,829.
Estimate to complete
ETC = EAC - AC
ETC = $1,063,829 - 950,000 = $113,829
Estimate At Completion
(EAC) forecasts the total
cost of the project based
on current project
performance
Estimate To Complete
(ETC) forecasts how
much more money will
be required to finish the
project
Based on current performance, the project
requires $113,829 to get it finished
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Control Costs Formulas:
Variance at completion
VAR = BAC – EAC
VAR = $1,000,000 - $1,063,829 = -$63,829
Based on current performance, the project will
run about $63,829 over budget
Variance At Completion
(VAR) predicts difference
between the budgeted
and actual project cost at
the end of the project
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Thank You
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Q&A:
WBS Element
P
Q
R
S
PV
$1,000
$2,000
$1,000
$2,000
EV
$1,100
$1,800
$1,200
$1,900
AC
$1,150
$2,100
$1,050
$1,800
1. Using the table above, the cost performance index (CPI) for WBS Element R is:
a. 0.875
b. 1.14
c. 0.952
d. 0.833
1.
b
CPI = EV / AC
CPI = 1200 / 1050
CPI = 1.14
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Q&A:
WBS Element
P
Q
R
S
PV
$1,000
$2,000
$1,000
$2,000
EV
$1,100
$1,800
$1,200
$1,900
AC
$1,150
$2,100
$1,050
$1,800
2. Using the table above, which WBS element is over budget and behind schedule?
(important)
a. Element P
b. Element Q
c. Element R
d. Element S
2.
b
CV = EV – AC = 1800 – 2100 = -300 (over budget)
SV = EV – PV = 1800 – 2000 = -200 (behind schedule)
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Q&A:
WBS Element
P
Q
R
S
PV
$1,000
$2,000
$1,000
$2,000
EV
$1,100
$1,800
$1,200
$1,900
AC
$1,150
$2,100
$1,050
$1,800
3. Using the table above, which WBS element has a favorable cost variance of
$150?
a. Element P
b. Element Q
c. Element R
d. Element S
3.
c
CV = EV – AC = 1200 – 1050 = 150 favorable variance
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4. The work breakdown structure, the work packages, and the company’s
accounting system are tied together through the:
a. Chart of accounts
b. Overhead rates
c. Budgeting system
d. Capital budgeting process
4.
a
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5. Management reserves are normally defined as a percentage of the total budget.
As a project goes through its life cycle phases, the project manager wants the
dollar value of the management reserve to ___________, whereas the customer
wants the dollar value of the management reserve to ___________.
a. Increase, increase
b. Increase, decrease
c. Decrease, increase
d. Remain the same, be returned to the customer
5.
d
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6. Which of the following types of cost are not relevant to making project
financial decisions:
a. Sunk cost
b. Opportunity cost
c. Material cost
d. Labor cost
6.
a
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7. Upon completion of 75% of the project, the original schedule and cost estimate
that were submitted at the inception of the project are referred to as the:
a. Baseline
b. Budgeted costs
c. Estimates upon completion costs
d. Scheduled costs
7.
a
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8. Which of the following would increase the accuracy of estimating the project
cost?
a. Pricing out the work at higher levels in the work breakdown structure
b. Using historical data from a non similar project
c. Talking to people who have worked on similar projects
d. Intuition
8.
c
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Direct Labor
$10.50
6374 hours
$68,329
$10.72
Planned price/unit
Actual units/hour
Actual cost
Actual price/unit
Direct Material
$14.77
5433 units
$83,994
$15.46
9. Using the table Above, the labor rate cost variance is:
a. $66,927.00
b. $68,329.00
c. $386.00
d. ($0.22)
9.
d
Labor Rate Cost Variance = Planned Cost (BAC) – Actual Cost (AC)
Labor Rate Cost Variance = 10.50 – 10.72
Labor Rate Cost Variance = -0.22
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10. What tool have project managers come to use to identify the costs associated
with a project?
a. A bill of materials
b. A Gantt chart
c. An arrow diagram network
d. A work breakdown structure
10.
d
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11. Cost estimating:
A. Involves developing an estimate of the costs of the resources needed to
complete project activities.
B. Includes identifying and considering various costing alternatives.
C. Involves allocating the overall estimates to individual work items. (cost
budgeting)
D. A and C
E. A and B
11.
e
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12) Which type of project cost estimate is the most accurate?
A)
B)
C)
D)
Preliminary
Definitive
Order of magnitude
Conceptual
12.
B
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13) )Cost budgeting can be best described by which of the following?
A) The process of developing the future trends along with the assessment of
probabilities, uncertainties, and inflation that could occur during the project
B) The process of assembling and predicting costs of a project over its life cycle
C) The process of establishing budgets, standards, and a monitoring system by
which the investment cost of the project can be measured and managed
D) The process of gathering, accumulating, analyzing, reporting, and managing
the costs on an on-going basis
13.
C
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14) ) Cost controls can be best described by which of the following?
A) The process of developing the future trends along with the assessment of
probabilities, uncertainties, and inflation that could occur during the project
B) The process of assembling and predicting costs of a project over its life cycle
C) The process of assembling and predicting costs of a project over its life cycle
D) The process of gathering, accumulating, analyzing, reporting, and managing
the costs on an on-going basis.
14.
D
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15) ) Three Point Statistical Estimating Formula Group. Expected Value =
A) (Optimistic + (4 X Most Likely) + Pessimistic ) x 6
B) (Optimistic + (4 X Most Likely) + Pessimistic ) divided by 6
C) (Optimistic + (4 X Most Likely) x Pessimistic ) divided by 6
D) Optimistic + (4 + Most Likely) + Pessimistic ) divided by 6
15.
B
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16) ) Which is not a technique used for cost estimation :
A) Analogous Estimating
B) Bottom-up Estimating
C) C) Parametric Estimating
D) Vendor Bid Analysis
E) Resource Leveling
16.
E
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