Chapter 7 Project Cost Management

To Complete Performance Index (TCPI)

(BAC-EV)/(BAC-AC)

Return on Investment (ROI)

measures the ratio of profit to total investment.

Cost Performance Index (CPI) or Cumulative CPI (CPI (little c))

A measure of cost efficiency on a project. It is the ratio of earned value (EV) to actual costs (AC). Less than 1.0 is bad, greater than 1.0 is good, and 1.0 is on track. CPI = EV/AC; CPI (little c) = EV (little c)/AC (little c)

Estimate to Complete (ETC) [i/o]

(EAC-AC); The expected cost needed to complete all the remaining work for a schedule activity, WBS component, or the project. See also earned value technique and estimate at completion.

Cost Range Table

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Standard Depreciation

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Definitive Estimate

A cost estimate that provides the accurate estimation of the project cost; the final estimate to be used on the project before implementation begins; Tolerance range: -10 to +10%

Control Accounts [t&t]

A management control point where scope, budget (resource plans), actual cost, and schedule are integrated and compared to earned value for performance measurement. See also work package.

Earned Value Management (EVM)

A management methodology for integrating scope, schedule, and resources, and for objectively measuring project performance and progress. Performance is measured by determining the budgeted cost of work performed (ie.earned value) and comparing it to the actual cost of work performed (ie actual cost).

Cost Variance (CV)

A measure of cost performance on a project. It is the difference between earned value (EV) and actual cost (AC). Represents the difference between what you have accomplished and what you have spent. CV = EV-AC

Schedule Performance Index (SPI)

A measure of schedule efficiency on a project. It is the ratio of earned value (EV) to planned value (PV); Less than 1.0 is bad, greater than 1.0 is good, and 1.0 is on track. SPI = EV/PV

Schedule Variance (SV)

A measure of schedule performance on a project. It is the difference between the earned value (EV) and the planned value (PV) ; SV = EV-PV

Bottom-up Estimating [t&t]

A method of estimating component of work. The work is decomposed into more detail. An estimate is prepared of what is needed to meet the requirements of each of the lower, more detailed pieces of work, and these estimates are then aggregated into a total quantity for the component of work. The accuracy of bottom-up estimating is driven by the size of and complexity of the work identified at the lower levels.

Internal Rate of Return (IRR)

A project comparison value; represents the discounted rate that zeroes out the net present value (NPV)

Reserves

A provision in the project management plan to mitigate cost and/or schedule risk. Often used with modifier (management reserve, contingency reserve) to provide further detail on what types of risk are meant to be mitigated.

Earned Value Technique (EVT) [t&t]

A specific technique for measuring the performance of work and used to establish the performance measurement baseline (PMB).

Cost Performance Baseline

A specific version of the time-phased budget used to compare actual expenditures to planned expenditures to determine if preventive or corrective action is needed to meet the project objectives.

Chart of Accounts [t&t]

A structure used to monitor project cost that usually aligns with a company's accounting system and WBS of the project or program.

Learning Curve Theory

A theory which states that more of something that is produced, the lower the unit cost of it becomes due to an improve in efficiency.

Net Present Value (NPV)

A value used in capital budgeting, in which the present value of cash inflow is subtracted from the present value of cash outflows; compares the value of a dollar today versus the value of that same dollar in the future, after taking inflation and return into account

Estimate at Completion (EAC) [i/o]

AC+Bottom-up ETC; BAC/CPI (little c); AC+(BAC-EV); AC+(BAC-EV)/CPI (little c)*SPI (little c); AC+(BAC-EV); AC+(BAC-EV)/CPI (little c)*SPI (little c); The expected total cost of a schedule activity, a WBS component, or the project when the defined scope or work will be completed. 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. See also earned value technique and estimate to complete.

Baseline

An approved plan for a project, plus or minus approved changes. It is compared to actual performance to determine if performance is within acceptable variance thresholds. Generally refers to the current baseline, but may refer to the original or some other baseline.

Budgetary Estimate

An estimate used to put money into a company's (or project's ) budget

Analogous Estimating [t&t]

An estimating technique that uses the values of parameters, such as scope, cost, budget, and duration or measures of scale such as size, weight, and complexity from a previous, similar activity as the basis for estimating the same parameter or measure for a future activity.

Code of Accounts [t&t]

Any numbering system used to uniquely identify each component of the WBS.

Parametric Modeling

Application of mathematical model used to estimate project components (time, cost, scope) by having other variables entered into the application.

Variance at Completion (VAC)

BAC-EAC

Life Cycle Costing (Total Cost of Ownership)

Consideration of not just project cost, but total ownership (operations and support cost of the item created by the project.

Direct Cost

Cost that is directly applicable to the project.

Indirect Cost

Cost that is not directly accrued on the project (EX. electricity, taxes, rent)

Profit Margin

Ratios between revenues and profit on a project, product, or initiative.

Tangible Cost/Benefit

Easily measurable cost or benefit of a project; measured in dollars

S-Curve

Graphic display of cumulative costs, labor hours, percentage of work, or other quantities, plotted against time. Used to depict planned value, earned value, and actual cost or project work. The name derives from the S-like shape of the curve produced on a project that starts slowly, accelerates, and then tails off. Also a term used to express the cumulative likelihood distribution that is a result of simulation, a tool of quantitative risk analysis.

Project Cost Management [KA]

Includes the processes involved in estimating, budgeting, and controlling costs so that the project can be completed withing the approved budget.

Profit

Money made after expenses have been subtracted from revenue

Management Reserves

Money set aside to account for unpredictable items ( unknowns)

Sunk Cost

Money that has already been spent on a project; should not be considered when selecting or evaluating a project

Communication Channels

N(N-1)/2

Demings Quality Cycle (TQM)

Plan Do Check Act (PDCA)

Earned Value (EV)

Represents the current amount of work (product) completed during a particular time period, regardless of cost or time.The value of work performed expressed in terms of the approved budget assigned to that work for a schedule activity or WBS component. Also referred to as the budgeted cost of work performed (BCWP).

Budget

The approval estimate for the project or any work breakdown structure component or any schedule activity. See also estimate.

Planned Value (PV)

The authorized budget assigned to the scheduled work to be accomplished for a schedule activity or WBS component. It represents the current amount that should have been spent on the project during a particular time period. Also referred to as the budgeted cost of work scheduled (BCWS).

To-Complete-Performance Index (TCPI)

The calculated projection of cost performance that must be achieved on the remaining work to meet a specified management goal, such as the budget at completion (BAC) or the estimate at completion (EAC). It is the ratio of "remaining work" to the "funds remaining".

Opportunity cost

The cost associated with giving up one opportunity for another.

Cost Management Plan [i/o]

The document that sets out the format and establishes the activities and criteria planning, structuring, and controlling the project costs. It is contained in, or is a subsidiary plan of, the project management plan.

Determine Budget [process]

The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.

Estimate Costs [process]

The process of developing an approximation of the monetary resources needed to complete project activities.

Control Costs [process]

The process of monitoring the status of the project to update the project budget and managing changes to the cost baseline.

Budget at Completion (BAC)

The sum of all the budgets established for the work to be performed on a project or a WBS component or a schedule activity. The total planned value for the project.

Actual Cost (AC)

Total costs actually incurred and recorded in accomplishing work performed during a given time period for a schedule activity or WBS component. Actual cost can sometimes be direct labor hours alone, direct costs alone, or all costs including indirect costs. Also referred to as the actual cost of work performed (ACWP). See also earned value management and earned value technique.

Rough Order of Magnitude (ROM) Estimate

Very early cost estimate used to give a rough estimate of what the project will cost to complete.

Variable Costs

costs that fluctuates with what is produced or pay per use. Ex. The more you print the greater the cost.

Fixed Costs

costs that is consistent on a project regardless of how many are used or created. Ex. You pay one time to have a book cover created regardless of the number of books you printed it on.

Benefit Cost Ratio (BCR)

is a project selection and analysis technique that compares the benefits to the cost of the initiative. The ratio is attained by dividing revenue by cost and applying quotient. The format is 3.65:1. Ex. A project could have a BCR of less than 1 (0.75:1), meaning that it had a benefit of 75 cents for each dollar invested. typically you wont approve such a project unless underlying factors such a Y2K

Payback Period

is the amount of time needed to earn back the original investment of the project. PMI suggest you select the project with the shortest payback period.

Expected Present Value (EPV)

is the present value analysis that takes into consideration the risk of the opportunity being considered.

Future Value

is the value of something such as cash or an investment at a specific point in the future.

Present Value

is the value of something today that you need to create a certain amount of investment in the future.

Accelerated Depreciation

it depreciates faster than standard depreciation.

Depreciation

the process of devaluing a capital asset in the tax system. Capital assets are those that are purchased and depreciated over time.