Project Cost Management

Overview of Project Cost Management

1. Key Concepts & Terms

2. Steps of Project Cost Management
3. Plan Cost Management
4. Estimate Costs
5. Determine Budget
6. Control Costs
Key Concept and Terms
Key Concepts & Terms

1. Cost concept
2. Project Cost Management
3. Project Cost Management Processes
4. Key terms
5. Tailoring Consideration
6. Consideration for Adaptive Environment
Cost Concepts

A cost is the amount or equivalent paid or charged for something.

A cost can be variable or fixed .
Variable cost: cost that change with the amount of production or the
amount of work.
Ex: cost of material ,supplies and wages………
Fixed Cost: cost that do not change as production changes.
Ex: setup, rental…….
ØA cost can be either direct or indirect .
Ø Direct Cost: cost that are directly attributable to the work on the
project
Ex: team travel, team wages recognition and costs of material used for
project
Ø Indirect Cost: Over head items or cost incurred for the benefit of the more
then one project.
Ex: taxes , fringe benefits and janitorial services.
Project Cost Management

 Projectcost management is the processes involved in planning, estimating,

budgeting, financing, funding, managing, and controlling costs so that the
project can be completed within the approved budget.
Project Cost Management Processes

1. Plan Cost Management

2. Estimate Costs
3. Determine Budget
4. Control Costs
1. Plan Cost Management:

 Plan Cost Management is the process that establishes the policies,

procedures, and documentation for planning, managing, expending, and
controlling project costs. The key benefit of this process is that it provides
guidance and direction on how the project costs will be managed throughout
the project.
2.Estimate costs:

A cost estimate is the approximation of the cost of a program, project, or

operation. The cost estimate is the product of the cost estimating process.
The cost estimate has a single total value and may have identifiable
component values.
 Example:

you could quite confidently say that the new project will cost approximately
four million dollars.
3.Determine Budget:

 Determine Budget is the process of aggregating the estimated costs of

individual activities or work packages to establish an authorized cost baseline.
The key benefit of this process is that it determines the cost baseline against
which project performance can be monitored and controlled.
Diagram:
4.Cost control:

 Cost control is the practice of identifying and reducing business expenses to

increase profits, and it starts with the budgeting process. ... Cost control is
an important factor in maintaining and growing profitability.
Purposes of the Project Cost
Management Processes

 Themanagement uses these technologies to produce a product at the lowest

possible cost by identifying and eliminating any sort of unnecessary costs and
yield more profits. In other words, the use of this is to prevent cost waste
from taking place and execute business operations within the pre-determined
cost standards.
Key Terms

• Earned value management (EVM): a project management technique for

measuring project performance and progress based on the comparison of work
performed and work planned.
 • Life cycle costing: the concept of looking at cost over the entire life of the
product, not just the cost of the project to create the product.
• Value analysis (value engineering): the concept that focuses on finding a
less costly way to do the same work. • Cost risk: cost-related risks.
• Cost risk: cost-related risks.
Types of Cost

 Variable costs: costs that change with the amount of work.

 Fixed costs: costs that do not change with the amount of work.
 Direct costs: costs directly attributable to the work on the project
 Indirect costs: overhead items or costs incurred for the benefit of more than
one projects.
Cost estimate ranges

 Rough order of magnitude (ROM): used during project initiating; typical

range -25 to +75 percent.
 Budget estimate: when starting the plan iteration; typical range -10 to +25
percent.
 Definitive estimate: as progress planning progresses; typical range ± 10
percent or -5 to +10 percent.
Trends & Emerging Practices

• Expansion of EVM to include the concept of earned schedule (ES)

Tailoring Considerations

• Knowledge management
• Estimating and budgeting
• Earned value management
• Use of agile approach
Considerations for Adaptive
Environments
 Agilepractice uses lightweight estimation methods to generate high-level
forecast for project costs.
 Detailedestimates are reserved for short-term planning horizons in a just-in-
time fashion.
 Ina strict-budget projects, the scope and schedule are more often adjusted
to stay within the cost constraints.
 Step of Project Cost Management:

 Know your team’s expertise & job responsibilities

 Understand how your company's PM process works
 Expand your PM skill set
 Ask more of the right questions
Step 1:Know your team’s expertise and
job responsibilities

 Sometimes project managers are too focused on the numbers, and not the
people. Good project management process—estimation techniques included—
are built on solid relationships. Solid working relationships tend to make the
project estimation process easier, because the more you know about.
A good project manager knows his or her own role well and has the following
responsibilities down pat:

•Build a project plan out in a few hours

•Set up and facilitate a communications plan
•Read a spreadsheet, understand it, and translate it for anyone who asks what it's about
•Build a status report based on metrics provided by his or her favorite PM tools
Step 2: Understand how your company's
project management process works
 Youmay work for a company that abides by a singular process like agile,
waterfall, etc. In that case, you should study that process, know all of your
dependencies, and run with your estimates. If you work in a place that’s more
liberal with process and likes to experiment, make it your mission to
understand how things are done and what might happen to your project
schedule if you shift things around.

 Alwaysbe sure to include your team in any discussions related to estimating

projects and process.
Step 3: Expand your project
management skill set:
 Approach your job as though it’s continuing education. No matter where you
work, things will change.
I work in the web industry, but I’d never sell myself as a web designer or a
developer. That being said, I’ve learned enough about design and code over
the course of my career to make me somewhat knowledgeable. I would never
step into a project and say, "I’m the best resource to design or code this," but
I know enough about how things are done to ask the right questions and make
the proper assumptions about how they should or could be done.
A career in PM means you have to always stay on top of trends, changes
and deliverables in your industry.
Step4 : Ask more of the right questions:

 Whether you’re estimating a project based on a Request for Proposal (RFP), a

discussion, or a brief written message, you need to know every possible detail
of the project before you can provide a realistic estimate. This often means
that you have to ask more questions.
Plan Cost Management:

1. Plan Cost Management Overview

2. Plan Cost Management Data Flow
3. Plan Cost Management Input
4. Plan Cost Management Tools & Technique
5. Plan Cost Management Output
1.Plan Cost Management Overview

 Plan cost management is the process of defining how the project costs will
be estimated, budgeted, managed, and controlled.
 The key benefit: it provides guidance and direction on ho the project costs
will be managed throughout the project.
2.Plan Cost Management Data Flow
3.Plan Cost Management Input

 Project charter
 Project management plan
• Schedule management plan
• Risk management plan
 Enterprise environmental factors
 Organizational process assets
Explanation of Plan Cost Management Input

1. Project Management Plan

• contains information used to develop the cost management plan: Scope
baseline , Schedule baseline, Other information .

2. Project Charter
• provides the summary budget from which the detailed project costs are
developed.
3. Enterprise Environmental Factors
• organizational culture and structure can all influence cost management;
market condi ions;
t currency exchange rates;published commercial
information;
PMIS.
4. Organizational Process Assets
• financial controls procedures; historical information and lessons learned
knowledge bases; financial databases; and existing formal and informal
cost estimating and budgeting‐‐‐relatedpolicies, procedures, and guidelines
4.Plan Cost Management Tools &
Techniques
 Expert judgment
 Data analysis
Alternative analysis
 Meetings
Explanation of Plan Cost Management
Tools and Techniques
1. Expert Judgment
• guided by historical information, provides valuable insight about the
environment and information from prior similar
projects.
2. Analytical Techniques
• involve choosing strategic options to fund the project such as: self‐‐‐
funding, funding with equity, or funding with debt. The cost management
plan may also detail ways to finance project resources such as making,
purchasing, renting, or leasing.
• techniques may include: payback period, return on investment, internal
rate of return, discounted cash flow, and net present
value.
3. Meetings
• attendees at these meetings may include the project manager, the
project sponsor, selected project team members, selected stakeholders,
anyone with responsibility for project costs, and others as needed.
5.Plan Cost Management Output

 Project management plan

1. • Cost management plan
• Units of measure
• Level of precision
• Level of accuracy
• Organizational procedure links
• Control thresholds
• Rules of performance measurements
• Reporting formats
• Additional details
 Explanation of Plan Cost Management Output

1. Cost Management Plan

• describes how the project costs will be planned, structured, and controlled. the cost
management plan can establish the following:
  units of measure.

  Level of precision: the degree to which activity cost estimates will be rounded up or down (e.g.,
US$100.49 to US$100, or US$995.59 to US
$1,000)
  Level of accuracy: the acceptable range (e.g., ±10%)

 Organizational procedures links: the WBS provides the framework for the cost management plan,
allowing for consistency with the estimates, budgets, and control of costs.
  Control thresholds.
  Rules of performance measurement: EVM rules of performance
  Reporting formats
 Process descriptions

 Additional details
 Estimate Costs

1. • Estimate Costs Overview

2. • Estimate Costs Data Flow
3. • Estimate Costs Input
4. • Estimate Costs Tools & Techniques
5. • Estimate Costs Output
1.Estimate Costs Overview

• Estimate costs is the process of developing an approximation of cost of

resources needed to complete project work.
• Key benefit: it determines the monetary resources required for the project.
Estimate Costs Data Flow
Estimate Costs Input
 Project management plan
• Cost management plan
• Quality management plan
• Scope baseline
 Project documents
• Lessons learned register
• Project schedule
• Resource requirements
• Risk register
 Enterprise environmental factors
 Organizational process assets
Explanation of Estimate Cost input

1. Cost Management Plan

• defines how project costs will be managed and controlled.
2. Human Resource Management Plan

• rewards/recognition, which
provides project rstaffing are necessary
attributes, componenfor
spersonnel rates, and related
developing the p oject cost estimate . ts
3. Scope Baseline
with contractual and legal implications, such as health, safety,
security, performance, environmental,insurance, inte lectual
• additional information that may be found in the scope baseline

l
be considered
property rights, when develop
licenses, ng the c All
and permits. st of this information should
estimates. i o
4. Project Schedule
• 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 pro c
ess.
5. Risk Register
as a general rule, when the project experiences a negative ris event, the
• k
near‐‐‐termcost
be of the
a delay in the project
project will usually
schedule. increase,
n a similar way,and
the there
projectwill
team sometimes
should be sensitive to potential opportunities
I that can benefit the
business
schedule either by directly reducing activity costs or by accelerating the
6. Enterprise .Environmental Factors
• market conditions, published commercial information.
7. Organizational Process Assets
• cost estimating
and essons policies, cost estimating templates, historical information,
learned.
l
Estimate Costs Tools & Techniques
 Expert judgment
 One-point estimating 
Analogous estimating 
Parametric estimating 
Bottom-up estimating 
Three-point estimating
• Triangular distribution
• Beta distribution
 Data analysis
 Alternative analysis 
Reserve analysis
 Cost of quality
 Project management information system 
Decision making
• Voting
Explanation of Estimate Cost Tools and
Techniques
1. Expert Judgment
• guided by historical information, provides valuable insight about
the environment and information from prio rsimilar p r
ojects.
2. Analogous Estimating
• uses the values 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 measurement for a current project.
3. Parametric Estimating
• uses a statistical relationship between relevant historical data and
other variables (e.g., 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.
4. BoVom‐‐‐UpEstimating
• is 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. The detailed cost is then summarized or “rolled up” to higher
levels for subsequent reporting and tracking purposes.
5. Three‐‐‐PointEstimating
• Cost Most likely (cM). The cost of the activity, based on realistic effort
assessment for the required work and any predicted expenses.
• Cost Optimistic (cO). The activity cost based on analysis of the bcea‐
s‐‐ste scenario for the activity.
• Cost Pessimistic (cP). The activity cost based on analysis of the worst‐‐‐
case scenario for the activity.
• Two commonly used formulas are triangular and beta distributions:
  Triangular Distribution. cE = (cO + cM +cP) / 3
  Beta Distribution (from a traditional PERT analysis). cE = (cO + 4cM + cP) / 6
6. Reserve Analysis
• Cost estimates may include contingency reserves (sometimes called
contingency allowances) to account for cost uncertainty.
7. Cost of Quality (COQ) (details in next slide)
8. Project Management So^ware
9. Vendor Bid Analysis
• 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.
10. Group Decision‐‐‐MakingTechniques
• team‐‐‐basedapproaches, such as brainstorming, the Delphi or nominal
group techniques, are useful for engaging team members to improve
estimate accuracy and commitment to the emerging estimates
Estimate Costs Output

 Project documents
• Cost estimates
• Basis of estimates
 Project documents updates
• Assumption log
• Lessons learned register
• Risk register
Explanation of Estimate Cost output
q Project document
§ 1. Cost Estimates
§ Direct Cost: costs that are directly attribute to work on the project. eg.
training cost, travel cost, wages, cost of material used in the project, etc
§ Indirect Cost: overhead items or costs incurred for the benefit of more than
one project. eg. taxes, fringe benefits, etc
§ Variable Cost: change with the amount of production/work. e.g. material, supplies,
wages

§ Fixed Cost: do not change as production change. e.g. se‐tup,rental

§ 2. Basis of Estimates
§ 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
 Determine Budget

1. • Determine Budget Overview

2. • Determine Budget Data Flow
3. • Determine Budget Input
4. • Determine Budget Tools & Techniques
5. • Determine Budget Output
1.Determine Budget Overview

• Determine budget is the process of aggregating the estimated costs of

individual activities or work packages to establish an authorized cost baseline.
• Key benefit: it determines the cost baseline against which project
performance can be monitored or controlled.
2.Determine Budget Data Flow
3.Determine Budget Input
 Project management plan
• Cost management plan
• Resource management plan
• Scope baseline
 Projects documents •
Basis of estimates •
Cost estimates
• Project schedule
• Risk register
 Business documents •
Business case
• Benefits management plan
 Agreements

 Enterprise environmental factors 

Organizational process assets
Explanation of Determine Budget Input
1. Cost Management Plan
• describes how the project costs will be managed and controlled.
2. Scope Baseline
• includes project scope statement, WBS, WBS dictionary.
3. Activity Cost Estimates
• cost estimates for each activity within a work package are
aggregated to obtain a cost estimate for each work package.
4. Basis of Estimates
g
supportindetail s
for co t estimates contained in the basis for
• estimates should specify any basic assumptions dealing with the
inclusion or exclusion of indirect or other cos s in tthe project
budget
.
5. Project
This Schedule
information can be used to aggregate costs tothe calendar
• periods in which the costs are planned to be incurred.

6. Resource Calendars
7. Risk Register
• The risk register should be reviewed to consider how to aggregate
the risk response costs.
8. Agreements
Applicable agreement information and costs relating to products,
• services, or results that have been or will be purchased are included
when determining the budget.
9. Organizational Process Assets
• Existing formal and informal cost budgeting‐‐‐related policies,
procedures, and guidelines; cost budgeting tools; and reporting
methods.
4.Determine Budget Tools & Techniques

 Expert judgment
 Cost aggregation
 Data analysis
• Reserve analysis
 Historical information review
 Funding limit reconciliation • Financing
Explanation of Determine Budget Tools and
Techniques
1. Cost Aggregation
• 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.
2. Reserve Analysis
• Budget reserve
management res analysis
rves for hecanp establish both the contingency reserves and
oject. Judgment e t r
the 3. Expert
• guided by ect,
similar pro experience in ermining
aids in de an application
the area, knowledge area, discipline, industry, or
j
budget Relationships t .
4. Historical
•
involve
Any the userelationships
historical of project characteristics
that result in parameters)
parametric to developormathemat
estimates analogousal estimates
models
to predict total project
( ic
costs.
5. Funding Limit Reconciliation
The expenditure of funds should be reconciled with any funding limits on the
commitment of funds for the projec . tA variance between the funding limits and the
• planned expenditures will sometimes necessitate the rescheduling of work to level out
the rate of expenditures
5.Determine Budget Output

 Project management plan

• Cost baseline
 Project funding requirements
 Project documents updates
• Cost estimates
• Project schedules
• Risk register
Explanation of Determine Budget Output
1. Cost Baseline
• is the approved version of the time‐‐‐phased project
budget, excluding any management reserves (details at next
slide)
2. Project Funding Requirements
•total funding requirements and periodic funding
requirements (e.g., quarterly, annually) are from the
derived cost baseline. The cost baseline will projected
include expenditures plus anticipated liabilities.
the cost
• the total lus
bas line, funds required res
managemen are rves,
those
i included
in 3. any.e
Project p
Documents t
Updates e f
• such as risk register, activity cost estimates, and project
schedule
 Control Cost

1. • Control Cost Overview

2. • Control Cost Data Flow
3. • Control Cost Input
4. • Control Cost Tools & Techniques
5. • Control Cost Output
1. Control Cost Overview

• Control cost is the process of monitoring the status of the project to update
the project costs and managing changes to the cost baseline.
• Key benefit: the cost baseline is maintained throughout the project.
2.Control Cost Data Flow
3.Control Cost Input

 Project management plan

• Cost management plan
• Cost baseline
• Performance measurement baseline
 Project documents
• Lessons learned register
 Project funding requirements
 Work performance data
 Organizational process assets
Explanation of Control Cost Input
1. Project Management Plan
• contains cost baseline and cost management plan.
2. Project Funding Requirements
• requirements include projected expenditures plus anticipated
liabilities.
3. Work Performance Data
data includes
activities
• information
have started, theirabout project
progress, andprogress, such as which
which deliverables have
finished. Information also includes costs that have been authorized
and
4. Organizational
incurred. Process Assets
• include existing dformal and informal cost control‐‐‐related policies,
procedures, and guidelines; c ost contro tools
l and
; monitoring and
reporting metho s to be used.
4.Control Cost Tools & Techniques

 Expert judgment
 Data analysis
• Earned value analysis
• Variance analysis
• Trend analysis
• Reserve analysis
 To-complete performance index
 Project management information system
 Explanation of Control Cost Tools and
Techniques

• Earned Value Management (EVM): is the most common tool which help project
managers measure project performance and determine where the project stands in
relation to the budget and the schedule at a point in time.
• Work performance information: BAC, PV, EV,AC.
• Work performance measurement: CPI, CV, SPI, SV.

• Forecasting: ETC, EAC.

• To. Complete performance index: TCPI
Ø Work performance information:
Ø BAC‐ ‐Budget At Completion (project
budget). Ø PPV‐l‐a‐nned Value (value of work
schedule):
Ø PV = BAC * planned % complete.
Ø EEV‐a‐‐rned Value (value of work performed):
EV =BAC * actual % complete. AC
—Actual Cost (spent cost).
• Work performance measurement:

o SPI—Schedule Performance Index = EV/PV.

 If SPI > 1, you’re ahead of schedule. If SPI < 1, you’re behind schedule.
o SV—Schedule Variance =EVAV
If SV > 0, it tells you how many dollars you’re ahead. If SV < 0, it tells
you how many dollars you’re behind.
o CPI—Cost Performance Index = EV/AC.
 If CPI > 1, you’re under budget. If CPI < 1, you’re over budget.
o CV—Cost Variance = EV‐‐‐AC.
If CV > 0, it tells you how many dollars you’re above. If CV < 0, it tells
you how many dollars you’re below.
• Forecasting:
o Estimate to Complete (ETC), which tells you how
much more money you’ll probably spend on
project. your
o Estimate at Completion (EAC) is used to predict what
your project will actually cost when it’s complete.
o EAC = AC + bottom‐‐‐upETC
• Forecasting:
o 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.
Equation: EAC = AC + (BAEC‐V‐‐)
o 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. Equation: EAC = BAC / CPI
o EAC forecast for ETC work 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. This method
is most useful when the project schedule is a factor impacting the
ETC effort. Equation: EAC = AC + [(BAEC‐V‐‐) / (CPI × SPI)]
C‐omTopletePerformance
 Index (TCPI):
 measure of the cost performance that is required to be achieved with the
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.
5.EVM Formula
 Variances
• 䍠䒐 = 䎀䒐 − 䍀䍠 CV: cost variance, EV: earned value, AC: actual cost

• 䑠䒐 = 䎀䒐 − 䐰䒐 SV: schedule variance , PV: planned value

• 䒐䍀䍠 = 䍐䍀䍠 − 䎀䍀 C VAC: variance at completion, BAC: budget at completion

Ø Indexes
• • 䍠䐰䏀 = 䎀䒐 䍀䍠 CPI: cost performance index
•

• • 䑠䐰䏀 = 䎀䒐 䐰V SPI: schedule performance index

Ø To-complete performance index

• 䑰䍠䐰䏀 = 䍐䍀䍠 −䎀䒐 TCPI: To Complete Performance Index

䍐䍀䍠 −䍀䍠 BAC: Budget At
Completion or
䍐䍀䍠 −䎀䒐
•䏀 = 䎀䍀䍠 −䍀䍠
䐰
䍠
• Estimate at completion
䑰
• EAC = AC + bottom up ETC EAC: Estimate At completion
• EAC = BAC / CPI ETC: Estimate To Complete
Ø
• EAC = AC + BAC – EV
EAC = AC + 䍐䍀䍠
−
䎀䒐 䑠
䐰䏀
× 䍠䐰
6.Control Cost Output
 Work performance information
 Cost forecasts
 Change requests
 Project management plan updates
• Cost management plan
• Cost baseline
• Performance measurement baseline
 Project documents updates
• Assumption log
• Basis of estimates
• Cost estimates
• Lessons learned register
• Risk register
Explanation of control Cost Output

1. Work Performance Information

The calculated CV, SV, CPISPITCPI, and VAC va es for WBS
• , , lu
components,
documented andin particular
commun catedthe work
to packages and control accounts, are
stakeholders. i
2. Cost Forecasts
• EAC value is documented and communicated to stakeholders.
3. Change Requests
• analysis of project performance may result in a change request to the cost
baseline or other components of the project management plan.
4. Project Management Plan Updates
5. Project Documents Updates
6. Organizational Process Assets Updates
References

• [PMBOK6] – The PMBOK 6th edition from pmi.org

• [RITA9] – Rita Mulcahy’s PMP Exam Prep 9th edition from RMC Publications™