7. Cost Managment

Cost Performance Index

CPI = EV / AC, Cost Performance Index equals earned value divided by Actual Cost

Cost Variance

CV = EV-AC, Cost Variance equal Earned Value minus Actual Cost

Make or Buy Decision: The monthly lease cost is $1,500. To purchase the server, the initial investment is $45,000 and the monthly service fee is $250. How many months will it take for the monthly lease cost to equal the purchase cost?

$1,500M = $45,000 + $250M $1,500M - $250M = $45,000 $1,250M = $45,000 M = $45,000/$1,250 M = 36

Budget Estimate

-10% - +25%

Project Cost Management Processes

1. Plan cost management, 2. Estimate Cost, 3. Determine Budget, 4. Control Cost

Cost Management Plan

A component of a project or program management plan that describes how costs will be planned, structured, and controlled.

Definitive estimate

A cost estimate that provides an accurate estimate of project costs. Range -5% to +10%

To Complete Performance Index (TCPI)

A measure of the cost performance that must be achieved with the remaining resources in order to meet a specified management goal. TCPI is expressed as the ratio of the cost to finish the outstanding work to the budget available.

Estimate Cost - Tools & Techniques - Bottom-up estimating

A method of estimating project duration or cost by aggregating the estimates of the lower-level components of the work breakdown structure (WBS).

Benefit-cost ratio (BCR)

A ratio of benefits to costs. The amount of money a project is going to make versus how much it will cost to build it. The higher these numbers are the better.

Variance Reports

A report that goes through the difference between budget, standard costs and actual costs. Should be used when comparing the project's actual results to its baselines.

Estimate Cost - Tools & Techniques - Analogous Estimating

A technique for estimating the duration or cost of an activity or a project using historical data from a similar activity or project.

Estimate Cost - Tools & Techniques - Three-Point Estimate

A technique used to estimate cost or duration by applying an average of optimistic, pessimistic, and most likely estimates when there is uncertainty with the individual activity estimates. Triangular - Divide by 3, Beta - Divide by 6

Estimate Cost - Tools & Techniques - Alternative analysis

A technique used to evaluate identified options in order to select which options or approaches to use to execute and perform the work of the project.

Estimate Cost - Tools & Techniques - Parametric Estimating

A technique, effected by a calculation that employs an algorithm, used to determine cost or duration

Cost baseline

A time-phased budget that project managers use to measure and monitor cost performance.

Estimate at Completion - EAC

An estimate of what it will cost to complete the project based on performance to date. EAC = AC+ETC Estimate at Completion equals Actual Cost plus Estimate to Completion

Variance at Completion - VAC

BAC - EAC, Budgeted at Completion minus Estimated at Completion

Historical information review

Can assist in developing parametric or analogous estimates to create math models to predict total project cost.

Determine Budget - Outputs

Cost Baseline, Project Funding requirements, Project documents updates

Estimate Cost - Outputs

Cost Estimates, Basis of Estimates, Project documents updates, - Assumption log, - Lessons Learned register, - Risk Register

Plan Cost Management - Outputs

Cost Management Plan

Estimate Cost - Tools & Techniques - Reserve Analysis

Cost reserves are for unknown unknowns within a project. The management reserve is not part of the project cost baseline, but is included as part of the project budget.

Project schedule

Determines the start and finish dates for project activities and assigns resources to the activities.

Forecasting

Estimate at Completion - EAC, Budget at Completion - BAC

Estimate Cost - Tools & Techniques

Expert Judgement, Analogous estimating, Parametric Estimating, Bottom-up estimating, Three-point Estimating, Data Analysis, - Alternatives analysis, - Reserve analysis, - Cost of Quality, Project management Information System, Decision Making, - Voting

Plan Cost Management - Tools & Techniques

Expert Judgement, Data Analysis, Meetings

Determine Budget - Tools & Techniques

Expert judgement, Cost aggregation, Data analysis, - Reserve Analysis, Historical information review, Funding limit reconciliation review, Financing

Control Cost - Tools & Techniques

Expert judgement, Data analysis, - Earned Value Analysis - EVA - Variance Analysis - VA - Trend Analysis - Reserve Analysis To-complete performance index, Project management information system

Analogous cost estimating relies on which of the following techniques

Expert judgment

Project funding requirements

Forecast project costs to be paid that are derived from the cost baseline for total or periodic requirements, including projected expenditures plus anticipated liabilities.

Estimate Cost - Tools & Techniques - PMIS

Include spreadsheets, simulation software, and statistical analysis tools to assist with cost estimating.

Cost Estimates

Include the probable cost required to complete project work, as well as contingency amounts to account for identified risks, and management reserve to cover unplanned work.

Tailoring Considerations for Project Cost Management

Knowledge Management - formal knowledge, financial database repository, Estimating and budgeting - existing formal or informal cost management, policies, procedures and guidelines. Earned value management, Use of agile approach, Governance - formal or informal audit and governance policies, procedures, and guidelines

Definitive estimates

Narrows the range of accuracy

Variance Analysis

Process of examining differences between actual and budgeted revenues or costs and describing them in terms of price and quantity differences.

Plan Cost Management - Inputs

Project Charter, Project management plan, EEFs, OPAs

Estimate Cost - Inputs

Project Management Plan, - Cost Management Plan, - Quality Management Plan, - Scope baseline, Project documents, - Lessons Learned Register, - Project Schedule, - Resources requirements, - Risk register, EEFs, OPAs

Control Cost - Inputs

Project management plan, - Cost Management Plan, - Cost Baseline, - Performance measurement baseline, Project documents, - Lessons learned register, Project funding requirements, Work performance data, OPAs

Determine Budget - Inputs

Project management plan, - Cost Management Plan, - Resource Management plan, - Scope Baseline, Project Documents, - Basis of Estimates, - Cost Estimates, - Project schedule, - Risk Register, Business documents, Agreements, EEFs, OPAs

Considerations for Agile/Adaptive Environments

Projects with high-degree of uncertainty or not a fully developed scope may not benefit from detailed cost calculation because of frequent changes. Lightweight estimation methods can be used to generate a high-level forecast. Detailed estimates are reserved for short-term planning. High-variability project are subject to strict budgets, with the scope and schedule adjusted to stay within cost constraints.

There are three general kinds of estimates used during the project life cycle

ROM (rough order of magnitude), budget, and definitive

Schedule Performance Index

SPI = EV / PV, Schedule Performance Index equals earned value divided by planned value

Schedule Variance

SV = EV-PV, Schedule Variance equals Earned Value minus Actual Cost

Earned value analysis

Standard method of measuring a project's progress at any given point in time, forecasting its completion date and final cost, and analyzing variances in the schedule and budget as the project proceeds

Cost estimate

Supporting documentation for cost estimates - basis of estimate, - assumptions made, - known constraints, - identified risks, - range of possible estimates, - confidence level of the final estimate

Planned Value (PV)

The authorized budget assigned to scheduled work.

Estimate Cost - Tools & Techniques - Data Analysis - Cost of Quality (COQ)

The cost of doing things wrong versus doing things right that is, the price of non-conformance.

Key Concepts for Project Cost Management

The effect of the project decisions on the subsequent recurring cost of using, maintaining, and supporting the product, service, or results of the project. Also recognizing that different stakeholders measure project cost in different ways at different times.

Estimate to Complete - ETC

The expected cost to finish all the remaining project work. ETC=EAC-AC Estimate to Complete equals Estimate at completion minus Actual Cost

Earned Value (EV)

The 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.

Determine Budget

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

Funding Limit Reconciliation

The process of comparing the planned expenditure of project funds against any limits on the commitment of funds for the project to identify any variances between the funding limits and the planned expenditures.

Plan Cost Management

The process of defining how the project costs will be estimated, budgeted, managed, monitored, and controlled.

Estimate Cost

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

Control Cost

The process of monitoring the status of the project cost and manage changes to the cost baseline.

Project Cost Management

The processes involved in planning, estimating, budgeting, financing, funding, managing and controlling cost so that the project can be completed within the approved budget.

Internal rate of return (IRR) is best described as

The rate of growth a project is expected to generate

Actual Cost

The realized cost incurred for the work performed on an activity during a specific time period.

Budget at Completion -BAC

The sum of all budgets established for the work to be performed.

Cost-benefit analysis

The summed benefits of a project minus the associated costs. Present value is the value today of future cash flows. Net present value is used to analyze the profitability of a project.

What is the purpose of calculating the net present value (NPV) of each possible project?

To compare projects in order to select the best project to initiate.

Reserve analysis

Used to monitor the status of contingency and management reserves for the project to determine if these reserves are still needed or if additional reserves need to be requested.

Rough Order of Magnitude (ROM) Estimate

Very early cost estimate used to give a rough estimate of what the project will cost to complete. Range -25% to +75%

Payback period

When choosing a project based on payback period, the company should choose the project with the shortest payback period.

Control Cost - Outputs

Work performance information, Cost forecasts, Change requests, project management plan updates, 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 and ultimately for the entire project.

Forecasting report

predicts future project status and performance