Concepts

• The project manager should tie costs to activities and resources and build the estimates from the bottom up.

• At the point in the prrocess where budgets are creatd, you should have a well-defined worrk breakdown structure, an activity list with resource and duration estimates for each activity and a schedule. The budget is then constructed by applying rates and dates against those resources and activities to create activity cost estimates and a cost baseline, as prescribed in the cost management plan.

• Life-Cycle Costing
  • List -cycle costing looks at the total cost of ownership from purchase or creation, through operations, and finally to disposal. It is a practice that encourages making decisions based on the beigger picture of ownership costs.

• Value Engineering
  • Value Engineering is the practice of trying to get more out of the project in every possible way.
  • It is a way of working to increase the bottom line, decrease costs, improve quality, shorten the schedule, and generally squeeze more benefit and value out of each aspect of the project.
  • The key of value engineering is that the scope of work is not reduced by these other efforts.

Processes

• [Planning] Plan Cost Management

  • Plan Cost Management creates the plan that will guide and direct the activities in the other three cost management processes.

  • The general rule is that scope activities are performed first, schedule activies second, and cost and budget activities third, but as is true with most rules, there are exceptions to this one.
    • The exception is that overall budgets or budgetary constraints may be determined before the project is initated, so while the cost details will not be understood until after the scope has been planned and resources have been assigned and activity durations have been determined, the high-level constraints and operhaps even the funding schedules will often be specified in the project charter.

  • Plan Cost Management is a relatively streamlined process with a few common inputs and tools and a single, important output.

  • Inputs

    • Project Charter

    • Project Management Plan

    • Enterprise Environment Plan

    • Organizational Process Assets

  • Tools

    • Expert Judgement

    • Data Analysis

    • Meetings

  • Outputs

    • Cost Management Plan
      • It is the plan that describes how the processes of Estimate Costs, Determine Budget, and Control Costs will be carried out.
      • It will specify approval thersholds, how those approvals are carried out, and it will define how cost performance is to be measured.

• [Planning] Estimate Cost

  • In Estimate Costs, each schedule activity is analyzed to evaluated the activity time estimates and the resource estimates associated with them, and a cost estimate is produced.

  • Leeway of the estimating: (Estimate Type & Range)
    • Rough Order of Magnitude Estimate -25% to +75%
    • Preliminary Estimate -20% to +30%
    • Definitive Estimate -5% to 10%

  • Inputs

    • Project Management Plan

      • The cost management plan, the quality management plan, and the scope baseline are the three important components that will guide the process of Estimate Costs.

      • The Cost Management Planb specifies how costs estimates will be derived and how accurate the precise they are expected to be.

      • The Scope Baseline, created earlier in Create WBS, ties each element of the scope back top the underlying need it was designed to address.

      • The Project Scope Statement provides information on constraints and assumption related to the scope and these can dramatically affect the cost estimates.

    • Project Document

      • Lessons Learned Register

      • Project Schedule
        • Cost estimates are largely a function of the activity’s duration and the resources required.
        • The schedule contains all of the activities, and costs are estimated at a schedule activity level, but there may be additional ways in which the schedule can affect the cost estimates.

      • Resource Requirement
        • This document identifies the types and quantities of resources needed to get the work done.

      • Risk Register
        • The risk register may have specific information on identified risks related to costs.

    • Enterprise Environmental Factors

    • Organizational Process Assets

  • Tools

    • Expert Judgement

    • Analogous Estimating
      • The tool of analogous estimating uses the actual reults of projects that have been performed by your organization as the estimates for your activities.

    • Parametric Estimating
      • Parametric Estimating is a tool often used on projects that have access to good historical information, and it works best for linear, scalable projects.

    • Bottom-Up Estimating
      • The technique of bottom-up estimating products a separate estimate for each schedule activity.
      • Thses individual estimates are then aggregated up to summary nodes on WBS.
      • Bottom-Up Estimating is considered to be highly accurate. However it can also be time-consuming and labor-intensive.

    • Three-Point Estimating

    • Data Analysis
      • Alternatives Analysis
        • The reality of hard costs frequently motivates team to investigate other ways of accomplishing a goal or completing an activity. This invloves reviewing options for changing scope, schedule, size, quantities, or other creative ways to bring osts in line with the goals of the project.
      • Reserve Analysis
        • The reserve amount should be analyzed as part of the Estimate Costs process simply to ensure that the amount of reserve being planned properly reflects the risk associated with the project.
      • Cost of Quality
        • COQ, looks at all of the costs that will be realized in order to achieve quality.
        • The costs of items that are not conformant to quality standards are known as cost of poor quality, often abbreviated as CoPQ.

    • Project Management Information System

    • Decision Making

  • Outputs

    • Cost Estimates
      • These address how much it would cost to complete each schedule activity on the project along with a contingency or reserve amount.
      • The basic rule is if there is a cost anticipated to complete something, it should be reflected right here.

    • Basis of Estimates
      • It is important to include enough information on how you derived the activity cost estimates.

    • Project Documents Updates
      • It is normal for the assumptions log, the lessons learned register, and the risk register to be updated.

• [Planning] Determine Budget

  • The Determine Budget process time-phases the cost estimates so that the performing organization will know how to plan for cash flow and likely expenditures.

  • A good budget will help the organization plan its expenditures appropriatedly and will prevent them from tying up too much money throughout the life of the project.

  • Perform after Develop Schedule since that is where the project’s time line is determined.

  • It is based on the activity cost estimates, it should be performed after the process of Estimate Costs.

  • Inputs

    • Project Management Plan
      • Cost Mangement Plan
        • The cost management plan specifies how the budget will be created, as well as the role the budget will play in the management of the project.
      • Resource Management Plan
        • The resource management plan will have information about labor rates, material costs, and other information that will be used to create the cost baseline.
      • Scope Baseline
        • The scope baseline contains the project scope statement, the WBS and the WBS dictionary.
        • All those will give the information on why the scope was set where it was, what its limits are, and what other sope-related constraints exist.
        • The budget is not only mapped back to the schedule, but costs are also tied back to nodes on the work breakdown structure, and the WBS dictionary will provide expanded attributes, information, and details on each of the work packages.
      • Project Documents
        • Basis of Estimates
          • How you derived the cost estimates you are using here.
        • Cost Estimates
          • What each schedule activity is estimated to cost
        • Project Schedule
          • The cost baseline is time-phased, meaning that it shows what costs will be inccurred and when they will be inccrred.
          • The schedule helps tie these costs back to periods of time for planning purposes.
        • Risk Register
          • These risks need to be carefully considered as the budget and funding requirements are developed.
      • Business Documents
        • Business Case
          • The business case gives you an idea of why the project is being undertaken, which can give you an idea as to whether this particular activity gets premium resources or may be performed at a standard level.
        • Benefits Management Plan
          • This plan will indicate when, how and the expected size of benefits to be realized by the project, and this information can influence when project expenditures are made.
      • Agreements
        • Provide information on what costs the project is contractually obliged to incur as well as when.
      • Enterprise Environmental Factors
      • Organizational Process Assets

  • Tools

    • Expert Judgement
      • The most imortant toll used in the Determine Budget process.
      • Good estimates should almost always have some expert judgement applied. In most scenarios, the person doing the work or responsible for the activity should be consulted for input.

    • Cost Aggregation
      • Cost estimates should be rolled up to the work package level where they will be measured, managed, and controlled during the project.

    • Data Analysis
      • Data Analysis primarily looks at management reserve.
      • Contingency reserves are risk amounts for activity overrunm while management reserve is an amount controlled by the project manager for complete unknowns or similar risks.
      • The Contingency amount should be in keeping with the risk levels and tolerances on the project.

    • Historical Information Review
      • Historical information review means either an analogous or a parametric estimting model based on historical data.
      • Parametric estimates work best when the project being undertaken is highly similar to pervious projects and there is significant historical informaiton available within your organization or industry.

    • Funding Limit Reconcilation
      • Many companies are required to budget for projects months or years before the actual scope is known, and a single project may span sveral fiscal years.
      • It is normal for a project to receive a funding limit or constraint when the project is begun.
      • The project’s cost baseline ultimately needs to be compatible with these limitations.

    • Financing
      • Acquiring capital form outside sources may be necessary in order to meet the funding requirements.

  • Outputs

    • Cost Baseline
      • The cost baseline plus management reserve makes up the project’s budget.
      • Cost baseline includes cost estimates for all activities along with contingency reserves.
      • The Cost Baseline specifies what costs will be incurred and when they are anticipated. Larger projects may be divided into multiple cost baselines.
      • In traditional project, the funding forms an S curve, meaning that the costs start off slowly, accelerate throughout construction phase of the project, and begin to slow down during testing and closure.

    • Project Funding Requirements
      • The project funding requirements are made up of the cost baseline plus management reserves.
      • The funding requirements are almost always related to the planned expenditures.

    • Project Documents Updates
      • Oftentimes performing the process of Determine Budget results in changes to the project’s scope, schedule, risks, or costs.

• [Monitoring & Controlling] Control Costs

  • Two Important Things

    • They are proactive. They do not wait for changes to occur. Instead, they try to influence the factors that lead to change.

    • Controlling processes measure what was executed against what was planned.

  • Control Costs is concerned with cost variance.

  • Even positive cost variances need to be understood and the plan must be adjusted. Accurate planning is the goal here.

  • Control Costs is an essential process for ensuring that are carefully monitored and controlled. It ensures that the costs stay on track and that change is detected whenever it occurs.

  • Typical beginning as soon as the project incurs costs.

  • The activities associated with Control Costs are usually performed with more frequency as project costs increase.

  • Inputs

    • Project Management Plan
      • Cost Baseline
        • It is the most important component from Project Management Plan used in Control Costs.
        • A baseline is the original plan plus all approved changes.
        • The cost baseline shows what costs are projected and when they are projected to occur.
        • The cost baseline is the plan against which the actual costs are measured.
        • Projects that used Earned Value refer to the cost baseline as the performance measurement baseline.
      • Cost Management Plan
        • Another important component used in Control Cost
        • Cost Management Plan lays out how costs will be managed throughout the life of the project.

    • Project Documents

    • Project Funding Requirements
      • Project Funding Requirements are part of the plan against which the actual funding is measured.
      • Positive or Negative variances from the planned funding requirements will be evaluated so that corrective action may be taken if necessary.

    • Work Performance Data

    • Organizational Process Assets

  • Tools

    • Expert Judgement

    • Data Analysis
      • Earned Value Analysis
        • A method of measuring actual performance against the original plan.
        • Help identify areas where the project is performing differently than the plan.
        • Identify variances (such as Cost Variances) as well as trends (such as Cost Performance Index) that directly influence the Control Costs process.
      • Variane Analysis
        • All variances should be analyzed and understood.
      • Trend Analysis
        • Trends can alert you to problems before they manifest.
      • Reserve Analysis
        • Reserves are pools of money set aside to keep the project running smoothly in case a risk even occurs.
        • Periodic analysis is needed in order to ensure that the project still has the right amount set aside. Reserve Analysis is the technique used to evaluate and adjust reserves as needed.

    • TCPI
      • To-Complete Performance Index is an earned value technique that focuses on the performance needed in order to achieve your earned value targets.

    • Project Management Information System (PMIS)
      • Because the calculations involved in Control Costs (esp. the Earned Value calculations) can be tedious and complex. Project Management Software is used to calculate actual values and assist with what if analysis.

  • Outputs

    • Work Performance Information
      • The Performance Measurements of CV, SV, CPI, SPI, TCPI, and VAC are especially helpful to show variances and trends on how the project is performing.

    • Cost Forecasts
      • Budget forecasts are your projects for how much funding will be needed and when it will be needed from this point forward.
      • Two values that relate most closely to completion: Estimate At Completion (EAC), Estimate To Complete (ETC). They are used to help forecast a likely completion for the project.

    • Change Requests
      • Changes could take the form of reducing the scope, increasing the budget, or changing factors related to execution.

    • Project Management Plan Updates

    • Project Documents Updates

  Agile

  • The Agile Perspective on Cost Management
    • On projects that adopt an agile approach, flexibility and adaptability are favored over long range detailed planning, and that includes budgeting.
    • Agile projects may estimate costs for the next iteration in detail but would not try to create an accurate, long term plan.
    • Some budget estimates could be extrapolated by calculating the team “burn rate”, but they would not be detailed or necessarily accurate.

  Earned Value Measurements (EVM)

  • Budget at Completion (BAC)
    • Always begin by calculating BAC.
    • Means “How much we orignally expected this project to cost“.

  • Planned Value
    • The planned value is how much work was planned for this point in time.
    • Planned Value(PV) = Planned % complete X Budget-At-Completion(BAC)

  • Earned Value
    • Earned Value is based on the assumption that as you complete work on the project, you are adding value to the project.
    • Earned Value(EV) = Actual % Complete X Budget-At-Completion(BAC)

  • Actual Cost

  • Cost Variance
    • Cost Variance (CV) is how much actual costs differ from planned costs.
    • Cost Variance(CV) = Earned Value(EV) – Actual Cost(AC)
    • The reason use EV in the formula instead of PV is that we are calculating how much the actual costs have varied.
    • A negative Cost Variance(CV) indicates that costs are running higher than planned.

  • Schedule Variance
    • Schedule Variance(SV) is how much our schedule differs from our plan.
    • Schedule Variance (SV) = Earned Value(EV) – Planned Value(PV)
    • A positive SV would indicate that the project is ahead of schedule.

  • Cost Performance Index
    • An indicator as to how much we are getting for every dollar we spend.
    • Cost Performance Index(CPI) = Earned Value(EV) / Actual Cost(AC)
    • Values of 1 or greater are good, and values less than 1 are undesirable.

  • Schedule Performance Index
    • Schedule Performance Index(SPI) is a corollary to the cost performance index, and indicates how fast the poject is progressing compared to the porject plan.
    • Schedule Performance Index(SPI) = Earned Value(EV) / Planned Value(PV)

  • Estimate At Completion
    • Estimate-At-Completion (EAC) is the amount we expect the prroject to cost when it is finished, based on where we are today.
    • Estimate-At-Completion(EAC) = Budget-At-Completion(BAC) / CPI

  • Estimate To Completion
    • Estimate-To-Completion(ETC) is simply how much moer we expected to spend from this point forward based on what we’ve done so far.
    • Estimate-To-Completion(ETC) = Estimate-At-Completion(EAC) – Actual Cost(AC)

  • Variance At Completion
    • Variance-At-Completion(VAC) is the difference between what we originally budgeted and what we expect to spend.
    • Variance-At-Completion(VAC) = Budget-At-Completion(BAC) – Estimate-At-Completion(EAC)
    • A positive variance indicates that project is doing better than projected.

  • Cumulative CPI
    • The Cumulative CPI(CPIc) is simply all of the periodic earned value calculations added together(EVc) and divided by all of the periodic actual cost calculations added together(ACc).
    • Cumulative CPI(CPIc) = Cumulative Earned Value(EVc) / Cumulative Actual Cost(ACc)
    • The Cumulative CPI(CPIc) is very useful since the monthly CPI only provided a snapshot of your earned value performance during a certain period of time, but the cumulative CPI can show a number that fators in performance efficiency in all months up to a point in time.
    • The Cumulative CPI(CPIc) has been shown to be a good perdictor of performance at completion, even when used very early in the project.

  • TCPI
    • The To-Complete Performance Index(TCPI) is the perforrmance which must be achieved on all remaining work in order to meet either financial or schedule goals.
    • Two Variaties: TCPIc for Cost, TCPIs for Schedule.
    • To-Complete Performance Indicator for Cost (TCPIc) = (Budget-At-Completion(BAC) – Earned Value(EV)) / Remaining Funds
    • Remaining Funds = Budget-At-Completion(BAC) – Actual Cost(AC) if targeting original budget, or Estimate-At-Completion(EAC) – Actual Cost(AC) if targeting the current forcast.
    • A lower index is good, since it means that you could underperform and still meet your target, while an index of greater than 1 is bad since you are essentially saying that you would need to overperform against the plan in order to meet your estimates.

  • Type of Costs
    • Fixed Cost
      • Costs that stay the same throughout the life of the project. e.g. equipment.
    • Variable Cost
      • Costs that may vary on a project. e.g. hourly labor.
    • Direct Cost
      • Expenses that are billed directly to the projects. e.g. materials.
    • Indirect Cost
      • Costs that are shared and allocated among several or all projects. e.g. manager’s salary. The team might be direct costs on a project, but the manager’s salary is overhead and would be considered an indirect cost.
    • Sunk Cost
      • Costs that have been invested into or expended upon the project. If they are unrecoverable, they are to be treated as if they irrelevant.
    • Opportunity Cost
      • The cost of the loss of potential benefit from the alternatives when a choice is made that excludes those alternatives.
      • Opportunity Cost most often is associated with project selection.