PMP 7: Project Cost Management

Project Management Estimating Software Use in Estimate Costs

• Project management cost estimating software applications, computerized spreadsheets, simulation, and statistical tools are becoming more widely accepted to assist with cost estimating. • Such tools can simplify the use of some cost estimating techniques and thereby facilitate rapid consideration of cost estimate alternatives

TCPI Based on BAC: Equation

(BAC - EV) / (BAC - AC)

TCPI Based on EAC: Equation

(BAC - EV) / (EAC - AC)

EAC forecast for ETC (considering both SPI and CPI factors): Equation

AC + [(BAC - EV) / (cumulative CPIx cumulative SPI)]

AC

Actual Cost

Contingency Reserves

Allowances for unplanned but potentially required changes that can result from realized risks identifi ed in the risk register

Performance Review: Variance Analysis

As used in EVM compares actual project performance to planned or expected performance. Cost and schedule variances are the most frequently analyzed

BCR

Benefit Cost Ratio

Benefit Cost Ratio: Equation

Benefits (or Payback or Revenue) / Costs

BAC

Budget At Completion

Performance Reviews

Compare cost performance over time, schedule activities or work packages overrunning and under running the budget, and estimated funds needed to complete work in progress

CPI

Cost Performance Index

SPI Use

Determine whether the project will finish ahead of or behind its planned finish date

EAC forecast for ETC (work performed at the budgeted rate): Equation

EAC = AC + BAC - EV

EAC forecast for ETC (work performed at the present CPI): Equation

EAC = BAC / cumulative CPI

EV

Earned Value

EVM

Earned Value Management

Performance Review: Earned Value Performance

Earned value management compares the baseline plan to actual schedule and cost performance

Control Costs: Budget Forecasts

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

Performance Review: 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

CPI < 1

Indicates a cost overrun for work completed

CPI > 1

Indicates a cost underrun of performance to date

SPI < 1

Indicates less work was completed than was planned

SPI > 1

Indicates that more work was completed than was planned

Cost Variance

Is a measure of cost performance on a project. It is equal to the earned value (EV) minus the actual costs (AC). The cost variance at the end of the project will be the difference between the budget at completion (BAC) and the actual amount spent

Schedule Performance Index

Is a measure of progress achieved compared to progress planned on a project. It is sometimes used in conjunction with the cost performance index (CPI) to forecast the final project completion estimates. The SPI is equal to the ratio of the EV to the PV

Schedule Variance

Is a measure of schedule performance on a project. It is equal to the earned value (EV) minus the planned value (PV)

Cost Performance Index

Is a measure of the value of work completed compared to the actual cost or progress made on the project. It is considered the most critical EVM metric and measures the cost efficiency for the work completed. The CPI is equal to the ratio of the EV to the AC

To Complete Performance Index

Is the calculated projection of cost performance that must be achieved on the remaining work to meet a specified management goal, such as the BAC or the EAC

Actual Cost

Is the total cost actually incurred and recorded in accomplishing work performed for an activity or work breakdown structure component. It is the total cost incurred in accomplishing the work that the EV measured

Earned Value

Is the value of work performed expressed in terms of the approved budget assigned to that work for an activity or work breakdown structure component. It is the authorized work that has been completed, plus the authorized budget for such completed work

Payback Period

Number of years required for an organization to recapture an initial investment. Discount period is not taken into account in calculations for payback period

PMB

Performance Measurement Baseline

WBS Use in Estimate Costs

Provides the relationships among all the components of the project and the project deliverables

Efficiency Indicators

Reflect the cost and schedule performance of any project for comparison against all other projects or within a portfolio of projects. The variances and indices are useful for determining project status and providing a basis for estimating project cost and schedule outcome

Resource Calendars Use in Determine Budget

Resource calendars provide information on which resources are assigned to the project and when they are assigned. This information can be used to indicate resource costs over the duration of the project

SPI

Schedule Performance Index

SV

Schedule Variance

Selection Criterion with Payback Period

Select a project with a lower payback period

Project Selection Criterion with BCR

Select the project with the greater BCR

Project Selection Criterion with NPV

Select the project with the largest value, regardless of the project duration or payback period, as time value as already been taken into account

Recommendation when CPI > 1 and SPI < 1

Since SPI is less than 1, this means that project is behind schedule; hence it is recommended to crash the project to bring it on schedule. Please note that crashing may increase costs. Since your project has CPI greater than 1, cost will not be a concern

Control Costs: Work Performance Measurements

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

Reporting Formats

The formats and frequency for the various cost reports are defined

Performance Measurement Baseline

The total of Planned Value

Budget At Completion

The total planned value for the project

TCPI

To Complete Performance Index

Project Management Software Use in Control Costs

Used to monitor the three EVM dimensions (PV, EV, and AC), to display graphical trends, and to forecast a range of possible final project results

Schedule Variance when project is completed

Zero, because all planned values will have been earned

Most common EAC forecasting approach

a manual, bottom-up summation by the project manager and project team

Opportunity Cost is not...

a project selection criteria

SV best used in conjunction with

critical path methodology (CPM) scheduling and risk management

Crashing of a project results in

decreased duration and increased costs. This is reflected with CPI is less than 1 and SPI is greater than 1

EV monitored incrementally to

determine current status

EV monitored cumulatively to

determine the long-term performance trends

Schedule Variance indicates

if a project is falling behind its baseline schedule

Project Selection is performed in the

initiating phase. Any project selection methods are no longer valid once the project is in any of the subsequent process groups

BCR > 1

means that benefits (i.e. expected revenue) is greater than the cost. Hence it is beneficial to do the project

BCR < 1

means that benefits (i.e. expected revenue) is less than the cost. Hence it is not beneficial to do the project

Negative CV is often

non-recoverable to the project

In the earned value management technique, the cost performance baseline is referred to as

the performance measurement baseline (PMB)

Cost Variance indicates

the relationship of physical performance to the costs spent

Parametric estimating uses

unit cost rates in calculations, but doesn't determine those rates

0-100 Rule

whereby a task is considered to be either 0 percent complete or 100 percent complete, but nothing in between

Control Costs: Change Requests

• Analysis of project performance can result in a change request to the cost performance baseline or other components of the project management plan. • Change requests can include preventive or corrective actions and are processed for review and disposition through the Perform Integrated Change Control process

Forecasting

• As the project progresses, the project team can develop a forecast for the estimate at completion(EAC) that may differ from the budget at completion (BAC) based on the project performance. • If it becomes obvious that the BAC is no longer viable, the project manager should develop a forecasted EAC. • Forecasting the EAC involves making estimates or predictions of conditions and events in the project's future based on information and knowledge available at the time of the forecast. • Forecasts are generated, updated, and reissued based on work performance information provided as the project is executed. • The work performance information covers the project's past performance and any information that could impact the project in the future. • EACs are typically based on the actual costs incurred for work completed, plus an estimate to complete (ETC) 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. • The EVM method works well in conjunction with manual forecasts of the required EAC costs.

Control Costs: Organizational Process Assets Updates

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

Control Costs: Project Document Updates

• Cost estimates • Basis of estimates

Control Costs: Project Management Plan Updates

• Cost performance baseline. Changes to the cost performance baseline are incorporated in response to approved changes in scope, activity resources, or cost estimates. In some cases, cost variances can be so severe that a revised cost baseline is needed to provide a realistic basis for performance measurement. • Cost management plan

Variance Analysis Use in Control Cost

• Cost performance measurements (CV, CPI) are used to assess the magnitude of variation to the original cost baseline. • Important aspects of project cost control include determining the cause and degree of variance relative to the cost performance baseline and deciding whether corrective or preventive action is required. •The percentage range of acceptable variances will tend to decrease as more work is accomplished. • The larger percentage variances allowed at the start of the project can decrease as the project nears completion

Project Selection: Life Cycle Costs

• For two projects having the same investment, select a project with lower life cycle costs • Even if one project has a lower NPV, it may be selected if it has a lower life cycle cost

TCPI Based on BAC

• If it becomes obvious that the BAC is no longer viable, the project manager develops a forecasted estimate at completion (EAC). • Once approved, the EAC effectively supersedes the BAC as the cost performance goal.

TCPI Based on EAC

• If the cumulative CPI falls below the baseline plan, all future work of the project will need to immediately be performed 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 risks, schedule, and technical performance. • Once management acknowledges that the BAC is no longer attainable, the project manager will prepare a new estimate at completion (EAC) for the work, and once approved, the project will work to the new EAC value. • This level of performance is displayed as the TCPI (EAC)

EAC forecast for ETC (considering both SPI and CPI factors)

• In this forecast, the ETC work will be performed at an efficiency rate that considers both the cost and schedule performance indices. • It assumes both a negative cost performance to date, and a requirement to meet a firm schedule commitment by the project. • 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 (e.g., 80/20, 50/50, or some other ratio) according to the project manager's judgment.

Efficiency Indicators monitored as part of Control Costs

• Schedule Performance Index • Cost Performance Index

Variances monitored as part of Control Costs

• Schedule variance • Cost variance

Characteristics of Actual Cost

• The AC has to correspond in definition to whatever was budgeted for in the PV and measured in the EV (e.g., direct hours only, direct costs only, or all costs including indirect costs). • The AC will have no upper limit; whatever is spent to achieve the EV will be measured

Characteristics of EV

• The EV being measured must be related to the PV baseline (PMB) • The EV measured cannot be greater than the authorized PV budget for a component • The term EV is often used to describe the percentage completion of a project • A progress measurement criteria should be established for each WBS component to measure work in progress • Project managers monitor EV, both incrementally to determine current status and cumulatively to determine the long-term performance trends

EAC forecast for ETC (work performed at the budgeted rate)

• This EAC method accepts the actual project performance to date (whether favorable or unfavorable) as represented by the actual costs, and 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 performed at the present CPI)

• This method assumes what the project has experienced to date can be expected to continue in the future. • The ETC work is assumed to be performed at the same cumulative cost performance index (CPI) as that incurred by the project to date.

Performance Review Information when using EVM

• Variance analysis • Trend analysis • Earned value performance

Three most common methods for EAC forecast of ETC

• Work performed at the budgeted rate • Work performed at the present CPI • Work considering both SPI and CPI factors Each of these approaches can be correct for any given project and will provide the project management team with an "early warning" signal if the EAC forecasts are not within acceptable tolerances

Life Cycle Costs

• include the cost of operations, which is beyond the scope of the project • Includes direct and indirect costs • Includes periodic or continuing cost of operations and maintenance • life cycle costs are not the responsibility of the project manager

Bottum Up EAC Method

• method builds upon the actual costs and experience incurred for the work completed, and requires a new estimate to complete the remaining project work. • This method may be problematic in that it interferes with the conduct of project work. • The personnel who are performing the project work have to stop working to provide a detailed bottom-up ETC of the remaining work. • Typically there is no separate budget to perform the ETC, so additional costs are incurred for the project to conduct the ETC • The project manager's manual EAC can be quickly compared with a range of calculated EACs representing various risk scenarios.

Project Cost Management Processes

7.1 Estimate Costs 7.2 Determine Budget 7.3 Control Costs

Estimating Costs

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

Direct Costs

Those costs that can be directly traced to a specific project

Project Budgets

constitute the funds authorized to execute the project

Estimate Costs Constraints

• Budget • Required delivery dates • Available skilled resources • Organizational policies

WBS Dictionary Use in Determine Budget

The WBS dictionary and related detailed statements of work provide an identification of the deliverables and a description of the work in each WBS component required to produce each deliverable

Tools and Techniques for Control Costs

1. Earned Value Management 2. Forecasting 3. To-complete Performance Index 4. Performance Reviews 5. Variance Analysis 6. Project Management Software

Tools and Techniques for Estimate Costs

1. Expert Judgement 2. Analogous Estimating 3. Parametric Estimating 4. Bottom-up Estimating 5. Three-Point Estimates 6. Reserve Analysis 7. Cost of Quality (COQ) 8. Project Management Estimating Software 9. Vendor Bid Analysis

Inputs to Determine Budget

1. Activity Cost Estimates 2. Basis of Estimates 3. Scope Baseline 4. Project Schedule 5. Resource Calendars 6. Contracts 7. Organizational Process Assets

Estimate Costs: Project Document Updates

• The risk register

Outputs of Determine Budget

1. Cost Performance Baseline 2. Project Funding Requirements 3. Project Document Updates

Inputs to Estimate Costs

1. Scope Baseline 2. Project Schedule 3. Human Resource Plan 4. Risk Register 5. Enterprise Environmental Factors 6. Organizational Process Assets

Outputs of Control Costs

1. Work Performance Measurements 2. Budget Forecasts 3. Organizational Process Assets Updates 4. Change Requests 5. Project Management Plan Updates 6. Project Document Updates

Contracts Use in Determine Budget

Applicable contract information and costs relating to products, services, or results that have been purchased are included when determining the budget

Market Conditions Impact on Estimate Costs

Describe what products, services, and results are available in the market, from whom, and under what terms and conditions. Regional and/or global supply and demand conditions greatly influence resource costs

Rules of Performance Measurement

Earned value management (EVM) rules of performance measurement are set. For example, the cost management plan could: • Define the WBS and points at which measurement of control accounts will be performed, • Establish the earned value measurement techniques (e.g., weighted milestones, fixed formula, percent complete, etc.) to be employed, and • Specify the earned value management computation equations for determining the project estimate at completion (EAC) forecasts and other tracking methodologies

Scope Statement Use in Determine Budget

Formal limitations by period for the expenditure of project funds can be mandated by the organization, by contract or by other entities such as government agencies. These funding constraints are reflected in the project scope statement

Human Resource Plan Use in Estimate Costs

Project staffing attributes, personnel rates, and related rewards/recognition are necessary components for developing the project cost estimates

Characteristics of Project Cost Management

The ability to influence cost is greatest at the early stages of the project, making early scope definition critical • Should consider the stakeholder requirements for capturing costs. Different stakeholders will measure project costs in different ways and at different times. • Is primarily concerned with the cost of the resources needed to complete project activities. • Should also consider the effect of project decisions on the subsequent recurring cost of using, maintaining, and supporting the product, service, or result of the project. For example, limiting the number of design reviews can reduce the cost of the project but could do so by increasing the customer's operating costs. • The cost management planning effort occurs early in project planning and sets the framework for each of the cost management processes so that performance of the processes will be efficient and coordinated.

Cost Management Plan Use in Control Costs

The cost management plan describes how the project costs will be managed and controlled

Cost Performance Baseline Use in Control Costs

The cost performance baseline is compared with actual results to determine if a change, corrective action or preventive action is necessary

Control Costs

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

Indirect Costs

Those costs that cannot be directly traced to a specific project and therefore will be accumulated and allocated equitably over multiple projects by some approved and documented accounting procedure

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

Outputs of Estimate Costs

1. Activity Cost Estimates 2. Basis of Estimates 3. Project Document Updates

Tools and Techniques for Determine Budget

1. Cost Aggregation 2. Reserve Analysis 3. Expert Judgement 4. Historical Relationships 5. Funding Limit Reconciliation

Inputs of Control Costs

1. Project Management Plan 2. Project Funding Requirements 3. Work Performance Information 4. Organizational Process Assets

Earned Value Management

A commonly used method of performance measurement. It integrates project scope, cost, and schedule measures to help the project management team assess and measure project performance and progress. It is a project management technique that requires the formation of an integrated baseline against which performance can be measured for the duration of the project

Cost Estimates

A prediction that is based on the information known at a given point in time. It includes the identification and consideration of costing alternatives to initiate and complete the project

Activity Cost Estimate

A quantitative assessment of the likely costs for resources required to complete the activity

Cost of Quality (COQ) Use in Estimate Costs

Assumptions about costs of quality may be used to prepare the activity cost estimate

Reserve Analysis Use in Determine Budget

Budget reserve analysis can establish both the contingency reserves and the management reserves for the project

Management Reserves

Budgets reserved for unplanned changes to project scope and cost

Cost Aggregation Use in Determine Budget

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

Activity Cost Estimates Use in Determine Budget

Cost estimates for each activity within a work package are aggregated to obtain a cost estimate for each work package

Process Descriptions

Descriptions of each of the three cost management processes are documented

Units of Measure

Each unit used in measurements (such as staff hours, staff days, weeks, or lump sum) is defined for each of the resources

Estimate Activity Resources Impact on Estimate Costs

Estimate Activity Resources involves determining the availability and quantities required of staff and material needed to perform schedule activities. It is closely coordinated with cost estimating

Cost Baseline

Includes all authorized budgets, but excludes management reserves

Project Cost Management

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

Planned Value

Is the authorized budget assigned to the work to be accomplished for an activity or work breakdown structure component. It includes the detailed authorized work, plus the budget for such authorized work, allocated by phase over the life of the project

The key effective cost control

Is the management of the approved cost performance baseline and the changes to that baseline

Determine Budget: Expert Judgement Sources

Judgment provided based upon expertise in an application area, Knowledge Area, discipline, industry, etc., as appropriate for the activity being performed should be used in determining the budget. Expert judgment is available from many sources, including, but not limited to: • Other units within the performing organization, • Consultants, • Stakeholders, including customers, • Professional and technical associations, and • Industry groups

Scope Statement Use in Estimate Costs

Provides the product description, acceptance criteria, key deliverables, project boundaries, assumptions, and constraints about the project

Published Commercial Information Impact on Estimate Costs

Resource cost rate information is often available from commercial databases that track skills and human resource costs, and provide standard costs for material and equipment. Published seller price lists are another source of information.

Cost Management Plan

Sets out the format and establishes the criteria for planning, structuring, estimating, budgeting, and controlling project costs

Basis of Estimates Use in Determine Budget

Supporting detail for cost estimates should be specified. Any basic assumptions dealing with the inclusion or exclusion of indirect costs in the project budget are specified in the basis of estimates

Determine Budget

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

WBS Use in Determine Budget

The project WBS provides the relationships among all the project deliverables and their various components

Project Management Use in Control Costs

The project management plan contains the following information that is used to control cost: • Cost Performance Baseline • Cost Management Plan

Project Schedule Use in Determine Budget

The project schedule, as part of the project management plan, includes planned start and finish dates for the project's activities, milestones, work packages, planning packages, and control accounts. This information can be used to aggregate costs to the calendar periods in which the costs are planned to be incurred

Basis of Estimates

The supporting documentation should provide a clear and complete understanding of how the cost estimate was derived. Supporting detail for activity cost estimates may include: • Documentation of the basis of the estimate (i.e., how it was developed), • Documentation of all assumptions made, • Documentation of any known constraints, • Indication of the range of possible estimates (e.g., $10,000 (±10%) to indicate that the item is expected to cost between a range of values), and • Indication of the confidence level of the final estimate

Project Schedule Use in Estimate Costs

The type and quantity of resources and the amount of time which those resources are applied to complete the work of the project are major factors in determining the project cost. Schedule activity resources and their respective durations are used as key inputs to this process

WBS Dictionary Use in Estimate Costs

This and related detailed statements of work provide an identification of the deliverables and a description of the work in each WBS component required to produce each deliverable

Accuracy of Cost Estimates

Will increase as the project progresses through the project life cycle. Hence cost estimating is an iterative process from phase to phase

Work Performance Information Use in Control Costs

Work performance information includes information about project progress, such as which deliverables have started, their progress and which deliverables have finished. Information also includes costs that have been authorized and incurred, and estimates for completing project work

Project Cost Performance

measures against the authorized budget

Analogous Estimating Use in Estimate Costs

• Analogous cost estimating 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 project as the basis for estimating the same parameter or measure for a current project. • When estimating costs, 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 estimating approach, sometimes adjusted for known differences in project complexity. • Is frequently used to estimate a parameter when there is a limited amount of detailed information about the project, for example, in the early phases of a project. • Uses historical information and expert judgment. • Is generally less costly and time consuming than other techniques, but it is also generally less accurate. • Can be applied to a total project or to segments of a project, used in conjunction with other estimating methods. • Is most reliable when the previous projects are similar in fact and not just in appearance, and the project team members preparing the estimates have the needed expertise

Determine Budget: Historical Relationships

• Any historical relationships that result in parametric estimates or analogous estimates involve the use of project characteristics (parameters) to develop mathematical models to predict total project costs. • Such models can be simple (e.g., residential home construction is based on a certain cost per square foot of space) or complex (e.g., one model of software development costing uses multiple separate adjustment factors, each of which has numerous points within it)

Characteristics of Cost Estimates

• Are generally expressed in units of some currency (i.e., dollars, euro, yen, etc.), although in some instances other units of measure, such as staff hours or staff days, are used to facilitate comparisons by eliminating the effects of currency fluctuations • Sources of input information are derived from the outputs of project processes in other Knowledge Areas • Estimated for all resources that will be charged to the project. This includes, but is not limited to, labor, materials, equipment, services, and facilities, as well as special categories such as an inflation allowance or contingency costs • Can be presented in summary form or in detail. • Indirect costs, if they are included in the project estimate, can be included at the activity level or at higher levels

Expert Judgement Use in Estimate Costs

• Cost estimates are influenced by numerous variables such as labor rates, material costs, inflation, risk factors, and other variables. • Provides valuable insight about the environment and information from prior similar projects. • Can also be used to determine whether to combine methods of estimating and how to reconcile differences between them

Reserve Analysis Use in Estimate Costs

• Cost estimates may include contingency reserves (sometimes called contingency allowances) to account for cost uncertainty. • The 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. • Contingency should be clearly identified in cost documentation. • Contingency reserves are part of the funding requirements

Estimate Costs: Organizational Process Assets

• Cost estimating policies • Cost estimating templates • Historical information • Lessons learned

Determine Budget: Organizational Process Assets

• Existing formal and informal cost budgeting-related policies, procedures, and guidelines, • Cost budgeting tools, and • Reporting methods

Control Costs: Organizational Process Assets

• Existing formal and informal cost control-related policies, procedures, and guidelines; • Cost control tools; and • Monitoring and reporting methods to be used

Examples of requirements with contractual and legal implications

• Health • Safety • Security • Performance • Environmental • Insurance • Intellectual Property Rights • Licenses • Permits

Cost and accuracy of parametric models are more reliable when

• Historical information used to develop the model is accurate, • Parameters used in the model are readily quantifi able, and • Models are scalable, such that they work for a large project, a small project, and phases of a project

Project cost control includes

• Influencing the factors that create changes to the authorized cost baseline, • Ensuring that all change requests are acted on in a timely manner, • Managing the actual changes when and as they occur, • Ensuring that cost expenditures do not exceed the authorized funding, by period and in total for the project, • Monitoring cost performance to isolate and understand variances from the approved 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, and • Acting to bring expected cost overruns within acceptable limits

Bottom-up Estimating Use in Estimate Costs

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

The cost management plan can establish

• Level of accuracy • Units of measure • Organizational procedures links • Control thresholds • Rules of performance management • Reporting formats • Process descriptions

Examples of Cost Trade Offs and Risks

• Make versus buy • Buy versus lease • Sharing of resources

Estimate Costs: Enterprise Environmental Factors

• Market Conditions. • Published commercial information.

Three Key Dimensions of EVM

• Planned value • Earned value • Actual cost

Determine Budget: Project Document Updates

• Risk register, • Cost estimates, and • Project schedule

Components of a Scope Baseline

• Scope Statement • Work Breakdown Structure • WBS Dictionary • Requirements with contractual and legal implications

Scope Baseline Use in Determine Budget

• Scope Statement. • Work Breakdown Structure. • WBS Dictionary

Risk Register Use in Estimate Costs

• Should be reviewed to consider risk mitigation costs • Risks, which can be either threats or opportunities, typically have an impact on both activity and overall project costs. • As a general rule, when the project experiences a negative risk event, the near-term cost of the project will usually increase, and there will sometimes be a delay in the project schedule

Three-Point Estimates Use in Estimate Costs

• The accuracy of single-point activity cost estimates can be improved by considering estimation uncertainty and risk. • Cost estimates based on this equation (or even on a simple average of the three points) may provide more accuracy, and the three points clarify the range of uncertainty of the cost estimates

Determine Budget: Funding Limit Reconciliation

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

Characteristics of Management Reserves

• The project manager may be required to obtain approval before obligating or spending management reserve. • Are not a part of the project cost baseline, but may be included in the total budget for the project. • They are not included as a part of the earned value measurement calculations

Characteristics of Control Costs

• Updating the budget involves recording actual costs spent to date. • Any increase to the authorized budget can only be approved through the Perform Integrated Change Control process • 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 to allow the project team to stay within the authorized funding. • Thus much of the effort of cost control involves analyzing the relationship between the consumption of project funds to the physical work being accomplished for such expenditures.

Parametric Estimating Use in Estimate Costs

• Use a statistical relationship between historical data and other variables (e.g., square footage in construction) to calculate an estimate for activity parameters, such as cost, budget, and duration. • This technique can produce higher levels of accuracy depending upon the sophistication and underlying data built into the model. • Can be applied to a total project or to segments of a project, in conjunction with other estimating methods.

Determine Budget: Cost Performance Baseline

• an authorized time-phased budget at completion (BAC) used to measure, monitor, and control overall cost performance on the project. • It is developed as a summation of the approved budgets by time period and is typically displayed in the form of an S-curve • In the earned value management technique the cost performance baseline is referred to as the performance measurement baseline (PMB)

Level of Accuracy

Activity cost estimates will adhere to a rounding of the data to a prescribed precision (e.g., $100, $1,000), based on the scope of the activities and magnitude of the project, and may include an amount for contingencies

Estimate Activity Duration Impact on Estimate Costs

Activity duration estimates will affect cost estimates on any project where the project budget includes an allowance for the cost of financing (including interest charges) and where resources are applied per unit of time for the duration of the activity. Activity duration estimates can also affect cost estimates that have time-sensitive costs included in them

Vendor Bid Analysis

Cost estimating methods may include analysis of what the project should cost, based on the responsive bids from qualified vendors. Where projects are awarded to a vendor under competitive processes, additional cost estimating work can 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

PV

Planned Value

Control Costs Process Group

Planning Process Group

Determine Budget Process Group

Planning Process Group

Estimate Costs Process Group

Planning Process Group

Project cost control seeks out

The causes of positive and negative variances and is part of the Perform Integrated Change Control process

Organizational Procedures Links

The work breakdown structure (WBS) provides the framework for the cost management plan, allowing for consistency with the estimates, budgets, and control of costs. The WBS component used for the project cost accounting is called the control account (CA). Each control account is assigned a unique code or account number(s) that links directly to the performing organization's accounting system.

Determine Budget: Project Funding Requirements

• Total funding requirements and periodic funding requirements (e.g., quarterly, annually) are derived from the cost baseline. • The cost baseline will include projected expenditures plus anticipated liabilities. • Funding often occurs in incremental amounts that are not continuous, which appear as steps • The total funds required are those included in the cost baseline, plus management reserves, if any