Project Cost Management

OPA Updates

Causes of variances Corrective action chosen and the reasons Financial databases Other types of lessons learned from project cost control

Planned Value (PV)

(PV) is the authorized budget assigned to scheduled work to be accomplished for an activity or WBS component, not including management reserve. This budget is allocated by phase over the life of the project, but at a given moment, planned value defines the physical work that should be accomplished.

Cost Management Plan

A component of the PM plan and describes how the project costs will be planned, structured, and controlled. For example, Cost Management Plan can establish: Units of Measure Level of precision Level of accuracy Organizational procedures links Control thresholds Rules of performance measurement Reporting formats Process descriptions Additional details

Earned Value (EV)

A measure of work performed expressed in terms of the budget authorized for that work. It is the budget associated with the authorized work that has been completed. EV being measured needs to be related to the PMB EV measured cannot be greater than the authorized PV budget for a component. EV is often used to calculate the percent complete of a project. Progress measurement criteria should be established for each WBS component to measure work in progress. PMs monitor EV, both incrementally to determine current status and cumulatively to determine the long-term performance trends

Bottom-up estimating

A method of estimating a component of work. The cost of individual work packages or activities is estimated to the greatest level of specified detail. Detailed cost is then summarized or "rolled up" to higher levels for subsequent reporting and tracking purposes. Cost and accuracy of bottom-up cost estimating are typically influenced by the size and complexity of individual activity or work package

S-curve

A time-phased view of the cost baseline There are various components to the project budget and cost baseline. Activity cost estimates for various project activities along with any contingency reserves of these activities are aggregated into their associated work package costs. Those cost estimates, along with any contingency reserves estimated for the work packages, are aggregated into control accounts. The summation of the control accounts make up the cost baseline. Since the cost estimates that make up the cost baseline are directly tied to the schedule activities, this enables a time-phased view of the cost baseline which is typically displayed in the form of an S-curve. Management reserves are added to the cost baseline to produce the project budget. As changes warranting the use of management reserves arise, the change control process is used to obtain approval to move the applicable management reserve funds into the cost baseline.

Three-point estimating

Accuracy of single-point activity cost estimates may be improved by considering estimation uncertainty and risk and using three estimates to define an approximate range for an activity's cost Most likely (cM) Optimistic (cO) Pessimistic (cP) Triangular Distribution. cE = (cO + cM + cP) / 3 Beta Distribution (PERT) c = (cO + 4cM + cP) / 6

Estimate Costs Outputs

Activity cost estimates Basis of estimates Project documents updates

Basis of estimates

Amount and type of additional details supporting the cost estimate vary by application area. Regardless of level of detail, the supporting documentation should provide a clear and complete understanding of how the cost estimate was derived. Supporting detail for this process may include Documentation of the basis of the estimate (how it was developed) Documentation of all assumptions made Documentation of any known constraints Indication of the range of possible estimates ($10,000 +/- 10%) to indicate that the item is expected to cost between a range of values Indication of the confidence level of the final estimate

Historical relationships

Any historical relationships that result in parametric estimates or analogous estimates involves the use of project characteristics (parameters) to develop mathematical models to predict total project costs. These models may be simple or complex Both cost and accuracy can vary widely. They are most likely to be reliable when: Historical information used to develop the model is accurate Parameters used in the model are readily quantifiable Models ae scalable, such that they work for large projects, small projects, and phases of a project

Cost Baseline

Approved version of time-phased project budget, excluding management reserves, which can only be changed through formal change control procedures and used as a basis for comparison to actual results. Its developed as a summation of approved budgets for different schedule activities

Forecasting

As project progresses, the team may develop a forecast for EAC that may differ from BAC based on the project performance. If it becomes obvious that BAC is no longer viable, PM should consider the forecasted EAC. Involves making projections of conditions and events in the project's future based on current performance information and other knowledge available at the time of the eforecast. Forecasts are generated, updated, and issued based on work performance data that is provided as the project is executed. This data/information covers the project's past performance and any information that could impact the project in the future

Variance analysis

As used in EVM, is the explanation (cause, impact, and corrective actions) for cost (CV = EV - AC), schedule (SV = EV - PV), and variance at completion (VAC = BAC - EAC) variances. Cost and schedule variances are the most frequently analyzed measurements.

Performance reviews

Compare cost performance over time, schedule activities, or work packages overrunning and underrunning the budget, and estimated funds needed to complete work in progress. If EVM is being used, the following is determined: Variance analysis Trend analysis Earned value performance

Earned value performance

Compares the performance measurement baseline to actual schedule and cost performance. If EVM is not being used, then the analysis of the cost baseline against actual costs for the work performed is used for cost performance comparisons

Determine Budget Inputs

Cost Management Plan Scope baseline Activity cost estimates Basis of estimates Project schedule Resource calendars Risk register Agreements OPAs

Determine Budget T & Ts

Cost aggregation Reserve analysis Expert judgment Historical relationships Funding limit reconciliation

Determine Budget Outputs

Cost baseline Project funding requirements Project documents updates

Cost aggregation

Cost estimates are aggregated by work packages in accordance with the WBS. The work packages cost estimates are then aggregated for the higher component levels of the WBS - such as control accounts - and ultimately fo the entire project

Vendor bid analysis

Cost estimates may include analysis of what the project should cost, based on the responsive bids from qualified vendors. When projects are awarded to a vendor under competitive processes, additional cost estimating work may be required of the project team to examine the price of individual deliverables and to derive a cost that supports the final total project cost

Reserve analysis

Cost estimates may include contingency reserves (sometimes called contingency allowances) to account for cost uncertainty. Contingency reserves are the budget within the cost baseline that is allocated for identified risks, which are accepted and for which contingent or mitigating responses are developed. Contingency reserves are often viewed as the part of the budget intended to address the "known-unknowns" that can affect a project. Contingency reserve may be a percentage of the estimated cost, a fixed number, or may be developed by using quantitative analysis methods. As more precise information about the project becomes available, the contingency reserve may be used, reduced, or eliminated.

Plan Cost Management Outputs

Cost management plan

Estimate Costs Inputs

Cost management plan Human resource management plan Scope baseline Project schedule Risk register EEFs OPAs

Additional details for Cost Management Plan

Description of strategic funding choices Procedure to account for fluctuations in currency exchange rates Procedure for project cost recording

Estimated Time to Complete (ETC)

EACs are typically based on the actual costs incurred for work completed, plus an ETC (estimate to complete) the remaining work. It is incumbent on the project team to predict what it may encounter to perform the ETC, based on its experience to date. This EVM method works well in conjunction with manual forecasts of the required EAC costs.

Rules of performance measurement

EVM rules of performance measurement are set. For example, cost management plan may: Define the points in the WBS at which measurement of control accounts will be performed Establish the EVM techniques to be employed (weighted milestones, fixed-formula, % complete) Specify tracking methodologies and the EVM computation equations for calculating projected EAC forecasts to provide a validity check on bottom-up EAC

Control Costs T & Ts

Earned Value Management Forecasting To-complete performance index (TCPI) Performance reviews Project management software Reserve analysis

Cost forecasts

Either a calculated EAC value or bottom-up EAC value is documented and communicated to stakeholders

Bottom-Up Summation

Equation : EAC = AC + Bottom-up ETC Most common EAC forecasting approach is a manual, bottom up summation by the PM and team. This method builds upon the actual costs and experience incurred for work completed, and requires a new estimate to complete the remaining project work PMs manual EAC is quickly compared with a range of calculated EACs representing various risk scenarios. When calculating EAC values, the cumulative CPI and SPI values are typically used. Will provide the PM team with an "early warning" signal if the EAC forecasts are not within acceptable tolerances

Cost performance index (CPI)

Equation: CPI = EV / AC A measure of the cost efficiency of budgeted resources, expressed as a ratio of earned value to actual cost. *It is considered the most critical EVM metric and measures the cost efficiency for the work completed. * A CPI value of less than 1.0 indicates a cost overrun for work completed. A CPI value greater than 1.0 indicates a cost underrun of performance to date. The CPI is equal to the ratio of th EV to the AC. The indices are useful for determining project

Cost variance (CV)

Equation: CV = EV - AC The amount of budget deficit or surplus at a given point in time, expressed as the difference between earned value and the actual cost; a measure of cost performance on a project. It is equal to the EV minuse th AC. Cost variance at the end of the project will be the difference between the BAC and the actual amount spent. The CV is particularly critical because it indicates the relationship of physical performance to the costs spent. Negative CV is often difficult for the project to recover.

EAC forecast for ETC work performed at the budgeted rate

Equation: EAC - AC + (BAC - EV Accepts the actual project performance to date (whether favorable or unfavorable) as represented by the actual costs, Predicts that all future ETC work will be accomplished at the budgeted rate. When actual performance is unfavorable, the assumption that future performance will improve should be accepted only when supported by project risk analysis

EAC forecast for ETC work considering both SPI and CPI factors

Equation: EAC = AC + [(BAC - EV) / (CPI x SPI)] ETC work will be performed at an efficiency rate that considers both cost & schedule performance This method is most useful when the project schedule is a factor impacting the ETC effort. Variations of this method weigh the CPI and SPI at different values (80/20, 50/50, or some other ration) according to PM's judgment.

EAC forecast for ETC work performed at the present CPI

Equation: EAC = BAC / CPI Assumes what the project has experienced to date can be expected to continue in the future. ETC work is assumed to be performed at the same cumulative CPI as that incurred by project to date

Schedule performance index (SPI)

Equation: SPI = EV / PV A measure of schedule efficiency expressed as the ratio of earned value to planned value. It measures how efficiently the project team is using its time. It is sometimes used in conjunction with the CPI to forecast the final project completion estimates. An SPI value less than 1.0 indicates less work was completed than was planned An SP greater than 1.0 indicates more work was completed than was planned. Since SPI measures all project work, performance on the critical path also needs to be analyzed to determine whether the project will finish ahead of or behind it's planned finish date. The SPI is equal to the ratio of the EV of the PV

Trend analysis

Examines project performance over time to determine if performance is improving or deteriorating. Graphical analysis techniques are valuable for understanding performance to date and for comparison to future performance goals in the form of BAC versus EAC and completion dates.

Funding limit reconciliation

Expenditure of funds should be reconciled with any funding limits on the commitment of funds for the project. A variance between funding limits and planned expenditures will sometimes necessitate rescheduling of work to level out rate of expenditures. Its accomplished by placing imposed date constraints for work into schedule

Estimate Costs T & Ts

Expert judgment Analogous estimating Parametric estimating Bottom-up estimating Three-poine estimating Reserve analysis Cost of quality PM software Vendor bid analysis Group decision-making techniques

Plan Cost Management T & Ts

Expert judgment Analytical Techniques Meetings

Project Cost Control Includes:

Influencing the factors that create changes to the authorized cost baseline Ensuring all CRs are acted on in a timely manner Managing actual changes when and as they occur Ensuring that cost expenditures do not exceed th authorized funding by period, by WBS component, by activity, and in total for the project Monitoring cost performance to isolate and understand variances from the approval cost baseline Monitoring work performance against funds expended Preventing unapproved changes from being included in the reported cost or resource usage Informing appropriate stakeholders of all approved changes and associated cost Bringing expected cost overruns within acceptable limits

Earned Value Management (EVM)

Methodology that combines scope, schedule, and resource measurements to assess project performance and progress. Commonly used method of performance measurement for projects. Integrates the scope baseline with the cost baseline, and schedule baseline, to form performance measurement baseline, which helps PM team assess and measure project performance and progress. PM technique requires the formation of an integrated baseline against which performance can be measured for the duration of the project. The principles of EVM can be applied to all projects in any industry. EVM develops and monitors three key dimensions for each work package and control account: Planned Value Earned Value Actual Cost The 3 parameters of planned value, earned value, and actual cost can be monitored and reported on both a period-by-period basis (typically weekly or monthly) and on a cumulative basis.

S-Curves for EV Data

Often times S-curves are used to display EV data for a project that is performing over budget and behind schedule

Plan Cost Management Inputs

PM Plan Project Charter EEFs OPAs

Control Costs Inputs

PM Plan Project funding requirements Work performance data OPAs

Project Cost Management

Planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget. On some projects of smaller scope, cost estimating and cost budgeting are tightly linked and can be viewed as a single process that can be performed by a single person over a relatively short period of time. These are presented here as distinct processes because the tools and techniques for each are different. The ability to influence cost is greatest at the early stages of the project, making early scope definition critical Project Cost Management should consider the stakeholder requirements for managing costs. May measure project costs in different ways and at different times. For example, the cost of an acquired item may be measured when the acquisition decision is made or committed, the order is place, the item is delivered, or the actual cost is incurred or recorded for project accounting purposes Primary concern is cost of resources needed to complete project. It should also consider effect of project decisions on the subsequent recurring cost of using, maintaining, and supporting the product, service, or result of the project. Limiting the number of design reviews can reduce the cost of the project, but could increase the resulting product's operating costs. Predicting and analyzing prospective financial performance of the projects product may be performed outside of the project. In others, such as a capital facilities project, project cost management can include this work. When such predictions and analyses are included, cost management may address additional processes and numerous general financial management techniques such as return on investment, discounted cash flow, and investment payback analysis. Cost management planning occurs early in project planning and sets the framework for each of the cost management process so that performance of processes are efficient & coordinated.

Determine Budget

Process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. It determines the cost baseline against which project performance can be monitored and controlled. A project budget includes all the funds authorized to execute the project. The cost baseline is the approved version of the time-phased project budget, but excludes management reserves

Estimate Costs

Process of developing an approximation of the monetary resources needed to complete project activities. It determines the amount of cost required to complete project work. A prediction that includes identification and consideration of costing alternatives to initiate and complete the project. Cost trade-offs and risks should be considered such as make versus buy, buy versus lease, and the sharing of resources to achieve optimal costs Generally expressed in units of some currency (dollars, euros, yen, etc) in some instances other units of measure - staff hours or staff days are used to facilitate comparisons by eliminating the effects of currency fluctuations Review and refine during the course of the project Accuracy of a project estimate will increase as the project progresses. A project in the initiation phase may have a rough order of magnitude (ROM) estimate in the range of -25% to +75%. As more information is known, definitive estimates could narrow the range of accuracy to -5% to +10%. There may be guidelines for when such refinements can be made. Sources of information are derived from the outputs of processes in other KAs and all the info will remain available to cost management processes. Costs are estimated for all resources including labor, materials, equipment, services, and facilities, as well as special categories like inflation allowance, cost of financing, or contingency costs. A cost estimate is a quantitative assessment of the likely costs for resources required to complete the activity. Cost estimates may be presented at the activity level or in summary form.

Control Costs

Process of monitoring status of project to update project costs and managing changes to the cost baseline. It provides the means to recognize variance from the plan in order to take corrective action and minimize risk. Updating the budget requires knowledge of the actual costs spent to date. Any increase to the authorized budget can only be approved through Change Control . Monitoring the expenditure of funds without regard to the value of work being accomplished for such expenditures has little value to the project other than allowing the team to stay within the authorized funding. Much of the effort involves analyzing the relationship between the consumption of project funds to the physical work being accomplished for such expenditures. Key to effective cost control is management of approved cost baseline and changes to that baseline

Plan Cost Management

Process that establishes policies, procedures, and documentation for planning, managing, expensing and controlling project costs. It provides guidance and direction on how the project costs will be managed throughout the project. Cost management processes and their associated tools and techniques are documented in the cost management plan and is a component of PM Plan.

Scope Baseline

Project Scope Statement WBS WBS Dictionary

Activity Cost Estimates

Quantitative assessments of the probable costs required to complete project work. Cost estimates can be presented in summary form or in detail. Costs are estimated for all resources applied to the activity cost estimate. Including direct labor, materials, equipment, services, facilities, information technology, and special categories like cost of financing, (including interest charges), an inflation allowance, exchange rates, or a cost contingency reserve. Indirect costs if included in project estimate can be included at the activity level or at higher levels

Schedule variance (SV)

SV = EV - PV A measure of schedule performance expressed as the difference between the earned value and the planned value. It is the amount by which the project is ahead or behind the planned delivery date, at a given point in time; a measure of schedule performance on a project. It is equal to the EV minus th PV. The EVM schedule variance is a useful metric because it can indicate when a project is falling behind or is ahead of its baseline schedule. The EVM schedule variance will ultimately equal zero when the project is completed because all of the planned values will have been earned. Schedule variance is best used in conjunction with critical path method (CPM) scheduling and risk management

SV and CV

SV and CV values can be converted to efficiency indicators to reflect the cost and schedule performance of any project for comparison against all other projects or within a portfolio of projects. The variances are useful for determining project status

Project Management Plan

Scope Baseline Schedule Baseline Other information

Analytical Techniques

Strategic options to fund the project such as self-funding, funding with equity, or funding with debt. This plan may also detail ways to finance project resources such as making, purchasing, renting, or leasing. These decisions like other financial decisions affecting the project may affect project schedule and/or risks. Organizational policies and procedures may influence which financial techniques are employed in these decisions. Techniques may include: Payback period Return on investment Internal rate of return Discounted cash flow Net present value

Level of accuracy

The acceptable range used in determining realistic activity cost estimates is specified and may include an amount for contingencies (+/- 10%)

Work performance information

The calculated CV, SV, CPI, SPI, TCPI, and VAC values for WBS components, in particular the work packages and control accounts, are documented and communicated to stakeholders

Level of precision

The degree to which activity cost estimates will be rounded up or down based on scope of activities and magnitude of project ($100.49 to $100 or $995.59 to $1000)

To-complete performance index (TCPI)

The equation of the TCPI based on the BAC: (BAC - EV) / (BAC - AC) The equation for the TCPI based on the EAC: (BAC - EV) / (EAC - AC). A measure of cost performance required to be achieved with remaining resources in order to meet a specified management goal, expressed as the ratio of the cost to finish the outstanding work to the remaining budget. TCPI is the calculated CPI that is achieved on the remaining work to meet a specified management goal, such as the BAC or the EAC. If it becomes obvious that the BAC is no longer viable, PM should consider the forecasted EAC. Once approved, the EAC may replace the BAC in the TCPI calculation. The equation for TCPI is Work remaining (defined as the BAC minus the EV) Divided by funds remaining (either BAC minus AC or EAC minus AC) If the cumulative CPI falls below baseline all future work of project will need to be performed immediately in the range of the TCPI (BAC) to stay within the authorized BAC. Whether this level of performance is achievable is a judgment call based on a number of considerations, including risk, schedule, technical performance. This level of performance is displayed as the TCPI (EAC)

Actual Cost (AC)

The realized cost incurred for the work performed on an activity during a specific time period. It is the total cost incurred in accomplishing the work that the EV measured. AC needs to correspond in definition to what was budgeted in the PV and measured in the EV (direct hours only, direct costs only, or all costs including indirect costs). AC will have no upper limit, whatever is spent to achieve the EV will be measured.

Performance Measurement Baseline (PMB)

The total of the PV (planned value)

Budget at Completion (BAC)

The total planned value for the project

Project funding requirements

Total funding requirements and periodic funding requirements (quarterly, annually) are derived from the cost baseline. This will include projected expenditures plus anticipated liabilities. Funding often occurs in incremental amounts that are not continuous, and may not be evenly distributed, which appear as steps. Total funds required are those included in the cost baseline, plus management reserves, if any. Funding requirements may include the source(s) of funding

Parametric estimating

Uses a statistical relationship between relevant historical data and other variables (square footage in construction) to calculate a cost estimate for project work. This technique can produce higher levels of accuracy depending upon the sophistication and underlying data built into the model. This type can be applied to a total project or segments of a project, along with other estimating methods

Analogous Estimating

Uses values such as scope, cost, budget, and duration or measures of scale such as size, weight, and complexity from previous, similar project as the basis for estimating the same parameter or measurement for a current project. This technique relies on the actual cost of previous similar projects as the basis for estimating the cost of the current project. It is a gross value estimation approach, sometimes adjusted for known differences in project complexity Frequently used to estimate a value when there is limited amount of detailed information about the project like in the early phases of a project. Analogous cost estimating uses historical information and expert judgment It is generally less costly and less time consuming that other techniques, but it is also usually less accurate. It can be applied to a total project or to segments of a project. In conjunction with other estimating methods, this one is most reliable when the previous projects are similar in fact and not just in appearance, and the team members preparing the estimates have the needed expertise

Control thresholds

Variance thresholds for monitoring cost performance may be specified to indicate an agreed-upon amount of variation to be allowed before some action needs to be taken. Thresholds are typically expressed as percentage deviations from the baseline plan

Organizational procedures links

WBS provides framework for cost management plan, allowing for consistency with estimates, budgets, and control of costs. WBS component used for project cost accounting is called control account. Each control account is assigned a unique code or account number that links directly to the performing organizations accounting system

Control Costs Outputs

Work performance information Cost forecasts Change requests PM plan updates Project documents updates OPA Updates