Module five

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Module Five

7.0 Project Cost Management

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

PMBOKÂŽ Guide 2017 , Glossary

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7.0 Project Cost Management Learning Outcomes • • • • •

Discuss Project Cost Management ITTOs Discuss types of estimation Differentiate between contingency reserve and management reserve Develop project baseline - budget Calculate Cost Performance Index, Schedule Performance Index and Earned Value.

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7.0 Project Cost Management Knowledge Area Cost

Initiating

Planning 7.1 7.2 7.3

Executing

Monitoring and Control

Closing

7.4

Name the four processes in the Project Cost knowledge area.

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7.0 Project Cost Management Key Concepts

Project decisions

Effect

Subsequent recurring costs

• Prospective financial performance of the project’s product is performed outside of the project…

• Except in a “Capital facilities” project.

7.0 Project Cost Management Emerging Practices • Expansion of EVM to include ES • Tailoring the Project costs processes are applied • • • • •

Knowledge management repository Estimating / budgeting Earned Value Management (EVM) Use of Agile approach, planning, management Governance – Formal/ informal audits, policies

• Using Agile/ adaptive with high variability projects

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7.1 Plan Cost Management Knowledge Area: Cost Process Group: Planning “The process that establishes the policies, procedures, and documentation for planning, managing, expending, controlling project costs.”

PMBOK® Guide 2017, Glossary

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7.1 Plan Cost Management ITTOs Fill out the ITTOs below and check your answers in the PMBOK® Guide 2017, pg. 232

Tools & Techniques

Inputs What do you need beforehand?

How is it done?

Outputs What are the results?

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7.1.1.1-4 Plan Cost Management Inputs •Project Charter (4.1.3.1) •Project Management Plan (4.2.3.1) • Risk management plan • Schedule management plan • Other cost related plans; scheduling, scope, and communication

•EEFs • Market place conditions • Commercial data; resource cost rate, standard costs for material and equipment

•OPAs • Team knowledge; lessons learned and historical information • Cost estimating policies & templates

Project Management Institute , A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Sixth Edition, 2017 Project Management Institute, Inc. All rights reserved. Page 236-239.

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7.1.2.1-3 Plan Cost Management T&T •Expert Judgment (4.1.2.1) •Data Analysis • Choosing strategic options to fund the project • Identify ways to finance resources • Financial techniques: Payback period, ROI, IRR, discounted cash flow, NPV

•Meetings

Project Management Institute , A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Sixth Edition, 2017 Project Management Institute, Inc. All rights reserved. Page 237-238.

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7.1.3.1 Plan Cost Management Outputs Cost Management Plan •

Level of accuracy

•

Units of measure

•

Organization procedures links –WBS (5.4)

•

Control thresholds

•

Rules of performance measurement: EVM rules

•

Reporting formats and frequency

•

Process descriptions

•

Additional details: Strategic funding choices, currency exchange rates, project cost recording

Project Management Institute , A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Sixth Edition, 2017 Project Management Institute, Inc. All rights reserved. Page 238.

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7.2 Estimate Costs Knowledge Area: Cost Process Group: Planning “Process of developing an approximation of the monetary resources (costs of the resources) needed to complete project activities.”

PMBOK® Guide 2017, Glossary

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7.2 Estimate Costs Types of Cost • • • • •

Variable Fixed Direct Indirect Sunk

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7.2 Estimate Costs Estimating Accuracy

Estimating Method

Generic Type

WBS Relationship

Accuracy

Time to Prepare

Parametric

ROM

Top Down

-25%  +75%

Days

Analogy

Budget

Top Down

-10%  +25%

Weeks

Engineering

Definitive

Bottom Up

-5%  +10%

Months

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7.2 Estimate Costs Considerations • • • • • •

Actual costs to date and estimates to completion Proposal data Marketing intelligence Management goals Past performance and trends Resource Performance

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7.2 Estimate Costs ITTOs Fill out the ITTOs below and check your answers in the PMBOK® Guide 2017, pg. 240

Tools & Techniques

Inputs What do you need beforehand?

How is it How is it done?

Outputs What are the results?

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7.2.1.1-4 Estimate Costs Inputs •PMP • Cost MP • Quality MP • Scope baseline • Project scope statement (5.3.3.1) • WBS and WBS dictionary (5.4) • Additional information; legal, health, safety, permits, etc.

•Project documents • Lessons learned register • Project schedule - Work schedule and deliverables • Resource requirements • Risk register • SWOT analysis • Risk responses (What happens if…) (11.2.3.1)

• EEFs •OPAs • Team knowledge; lessons learned and historical information • Cost estimating policies & templates Project Management Institute , A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Sixth Edition, 2017 Project Management Institute, Inc. All rights reserved. Page 241-243

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7.2.2.1-8 Estimate Cost T&T How is it done?

•Expert judgment - Historical information •Analogous estimating - Estimate by analogy-parameters or scales •Parametric random order of magnitude estimating (ROM) •Bottom-up detailed estimating (engineering) •Three-point estimating •Data Analysis • Reserve analysis • Contingencies • Contingency Reserve VS. Management Reserve • Cost of quality (COQ) (8.1.2.2)

• Alternatives •PM software - MS Project, Primavera, Workbench (open source), etc.

•Decision-making techniques

Project Management Institute , A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Sixth Edition, 2017 Project Management Institute, Inc. All rights reserved. Page 243-246

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7.2.3.1-3 Estimate Costs Outputs 1. Cost estimates - quantitative assessment 2. Basis of estimates - documentation; assumptions; constraints; level of accuracy; basis of estimates

3. Project documents updates – assumption log, lessons learned, risk register

Project Management Institute , A Guide to the Project Management Body of Knowledge, (PMBOKÂŽ Guide) - Sixth Edition, 2017 Project Management Institute, Inc. All rights reserved. Page 246-247

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7.3 Determine Budget Knowledge Area: Cost Process Group: Planning “Process for aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.”

PMBOK® Guide 2017 , Glossary

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7.3 Determine Budget ITTOs Exercise Fill out the ITTOs below and check your answers in the PMBOK® Guide 2017, pg.. 248

Inputs What do you need beforehand?

Tools & Techniques How is done?

Outputs What are the results?

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7.3.1.1-6 Determine Budget Inputs •PMP • Cost management plan (7.1.3.1) • Resource Management plan • Scope baseline: scope statement, WBS, WBS dictionary •Project documents • Basis of estimates - inclusions and exclusions (7.2.3.2) • Cost estimates (7.2.3.1-2) • Project schedule (6.6.3.2) • Risk register (11.2.3.1) •Business documents • Business case • Benefits management plan •Agreements (12.2.3.2) •EEFs •OPAs Project Management Institute , A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Sixth Edition, 2017 Project Management Institute, Inc. All rights reserved. Page 250-251

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7.3.2.1-6 Determine Budget T&T • Expertise provided by any group or person with specialized knowledge or skill set • Cost aggregation • Data analysis - Reserve analysis • Historical information review • Funding limit reconciliation • Financing Project Management Institute , A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Sixth Edition, 2017 Project Management Institute, Inc. All rights reserved. Page 252-253

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7.3.3.1-3 Determine Budget Outputs What are the results?

1. Cost baseline- Authorized time phased budget at completion (BAC) 2. Project funding requirements 3. Project documents updates - Risk register, cost estimates, and project schedule • • •

In earned value mgmt. technique- cost performance baseline is the performance measurement baseline (PMB) Funding= Baseline + mgmt. reserve Funding is usually incremental

Project Management Institute , A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Sixth Edition, 2017 Project Management Institute, Inc. All rights reserved. Page 254-256

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7.3.3 Determine Budget Outputs Sample Cash Flow Graph

Time phased cash flow

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7.3.3 Determine Budget Outputs Project budget components

Project Management Institute , A Guide to the Project Management Body of Knowledge, (PMBOKÂŽ Guide) - Sixth Edition, 2017 Project Management Institute, Inc. All rights reserved. Figure 7-8, Page 255

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7.3.3 Determine Budget Outputs Cost Baseline- Funding Graph

Project Management Institute , A Guide to the Project Management Body of Knowledge, (PMBOKÂŽ Guide) - Sixth Edition, 2017 Project Management Institute, Inc. All rights reserved. Figure 7-9, Page 255

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7.4 Control Cost Knowledge Area: Cost Process Group: Monitoring and Controlling “Process of monitoring the status of the project to update the project budget and managing changes to the cost baseline.”

PMBOK® Guide 2017, Glossary

Prevention Detection Action Summary

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7.4 Control Costs ITTOs Exercise Fill out the ITTOs below and check your answers in the PMBOK® Guide 2017, pg.. 257

Inputs What do you need beforehand?

Tools & Techniques How is it done?

Outputs What are the results?

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7.4.1.1-5 Control Cost Inputs • Project Management Plan (4.2.3.1) • Cost management plan • Cost baseline • Performance measurement baseline

• • • •

Project documents – Lessons learned register Project funding requirements (7.3.3.2) Work performance data – Progress (4.3.3.2) OPAs • Cost control tools • Monitoring and reporting methods • Policies, procedures Project Management Institute , A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Sixth Edition, 2017 Project Management Institute, Inc. All rights reserved. Page 259-260

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7.4.2.1-4 Control Cost T&T • Expert judgment • Data Analysis • • • •

Earned Value Analysis (EVA) Variance Trend Reserve (7.2.2.6)

• To-Complete Performance Index (TCPI) • PMIS

Project Management Institute , A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Sixth Edition, 2017 Project Management Institute, Inc. All rights reserved. Page 260-268

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7.4.2 Control Cost T&T Change/Contingency Management Measure

• • • •

Monitor

Control

Identify problems Calculate the variances Analyze the reasons for variances Take necessary corrective action

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7.4.2 Control Cost T&T Change Management PARETO’S Principle

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7.4.2 Control Cost T&T Earned Value Management (EVM) “A project management technique that focuses on the completion of authorized work and its authorized budget, called the “Earned Value”, for the purpose of monitoring performance and predicting the final required costs and time necessary to finish the project.”

Fleming 2005, pg... 220

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7.4.2 Control Cost T&T Earned Value Performance Variances • The scheduling variance (SV) provides a comparison between planned and actual performance but does not include costs.

SV = EV - PV • The cost variance (CV) compares deviations only from the budget and does not provide a measure of comparison between work scheduled and work accomplished.

CV = EV - AC Kerzner, 2013

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7.4.2 Control Cost T&T Earned Value Performance Efficiency Indicators

• Schedule Performance Index (SPI) Progress achieved compared to progress planned on a project

SPI = EV/PV (>1 ~ More work was completed that was planned)

• Cost Performance Indicator (CPI) The value of the work completed compared to the actual cost or progress made on the project

CPI = EV/AC (>1 ~ A cost under-run of performance to date)

• TCPI (based on the BAC) Defines the performance required in order to achieve a previously set goal

TCPI = (BAC-EV)/(BAC-AC)

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7.4.2.1 Control Cost T&T Earned Value Management (EVM)

It is the one most effective performance measurement and feedback tools.

It answers such questions as: Under/ Over budget?

Ahead/ behind schedule?

Projected project cost?

Remaining work cost?

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7.4.2 Control Cost T&T Earned Value Status Reporting BAC

CUMMULATIVE COST

TIME LINE

PV AC SV EV

TIME

CV

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7.4.2. Control Cost T&T Earned Value Management (EVM) Term

Acrony m

Description

Formula

Earned Value

EV

How much work was actually completed during a given period of time? At a point in the schedule.

Actual% complete x BAC

Planned Value

PV

How much work should have been done according to the plan? At a point in time.

Planned % complete x BAC

Actual Cost

AC

Money spent during a given period of time.

Sum of the costs for a given period of time.

Cost Variance

CV

Difference between what was expected and what was actually spent.

EV-AC

Schedule Variance

SV

Difference between what we planned to be and where we are in the schedule.

EV-PV

Cost Performanc e Index

CPI

The rate at which project performance is meeting cost expectations during a given period of time.

EV/AC

Cumulative CPI

CPIc

The rate at which project performance is meeting cost expectations from the beginning up to a given period of time.

EVc/ACc

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7.4.2. Control Cost T&T Earned Value Management (EVM) (cont.)

Term

Acro nym

Description

Formula

Schedule Performance Index

SPI

The rate at which project performance is meeting schedule expectations during a given period of time.

EV / PV

Estimate At Completion

EAC

How much will the total cost be by the end of the project ?

BAC / CPIc

Estimate To Completion

ETC

From this point on, how much more are we forecasting it is going to cost to finish the project?

EAC - AC

Variance At Completion

VAC

Difference between what was budgeted and what will actually be spent.

BAC - EAC

To-Complete Performance Index

TCPI

Performance that must be achieved on all remaining work in order to meet schedule and financial goals.

(BAC-EV) / Remaining funds

To-Complete Performance Index

TCPI

Performance that must be maintained in order to complete the current EAC.

(BAC-EV) / (EAC-AC)

7.4.2.1 Control Cost T&T Earned Value Management (EVM) Exercise One You are the project manager of a railroad company in charge of building 100 Km of track in six months. The cost for the construction will be $2000 per Km. Two months into the project, you have spent $70,000 and completed 25km of track. Determine the performance (cost and schedule) at the two months mark by filling in the values in the following table: Term

Term

Budget At Completion (BAC)

Cost Performance Index (CPI)

Planned Value (PV)

Schedule Performance Index (SPI)

Earned Value (EV)

Estimated At Completion (EAC)

Actual Cost (AC)

Estimated To Completion (ETC)

Cost Variance (CV)

Variance At Completion (VAC)

Schedule Variance (SV)

To-Complete Performance Index (TCPI)

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7.4.2.1 Control Cost T&T Earned Value Management (EVM) Exercise Two You are the project manager of a construction company. The cumulative costs totaled $80,000 after the forth month on the job. The planned expenditures for four months were $100,000.

What is the status of your project?

Answer Behind schedule Under budget Over budget Ahead of schedule Can not be determined

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7.4.2.1 Control Cost T&T Earned Value Management (EVM) Exercise Three Your project budget is $1,000,000. You already completed 30 percent of the work. SPI is .85. What is EV?

Answer $700,000 $300,000 1,000,000 850,000 Can not be determined

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7.4.2.2 Cost Control T&T Forecasting • EAC forecast for ETC work performed at the budgeted rate EAC = AC+BAC-EV • EAC forecast for ETC work performed at the present CPI EAC = BAC/ CPIc • EAC forecast for ETC work considering SPI and CPI factors EAC= AC+[(BAC-EV) / (CPIc X SPIc)]

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7.4.2 Control Cost T&T To-Complete Performance Index (TCPI)

• TCPI (based on the BAC) = work remaining/ funds remaining = (BAC-EV)/(BAC-AC) • TCPI (Based on EAC) = work remaining/ funds needed = (BAC-EV)/ (EAC-AC)

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7.4.2 Control Cost T&T To-Complete Performance Index (TCPI)

Project Management Institute , A Guide to the Project Management Body of Knowledge, (PMBOKÂŽ Guide) - Sixth Edition, 2017 Project Management Institute, Inc. All rights reserved. Figure 7-13, Page

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7.4.2 Control Cost T&T TCPI Exercise I You are working on a project to be completed in 12 months and the total cost of the project is $400,000. You have spent $220,000 at the six months mark and 60% of the work has been completed so far. • Find the To Complete Performance Index (TCPI) for this project.

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7.4.2 Control Cost T&T TCPI Exercise II You are working on a project to be completed in 12 months and the total cost of the project is $400,000. You have spent $220,000 at the six months mark and 30% of the work has been completed so far. • Find the To Complete Performance Index (TCPI) for this project.

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7.4.3.1-5 Control Cost Outputs • Work performance information - CV, SV, CPI, and SPI • Cost forecasts - EAC • 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 Project Management Institute , A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Sixth Edition, 2017 Project Management Institute, Inc. All rights reserved. Page 268-270.

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7.0 Project Cost Management Summary • • • • •

Earned Value Project Management Estimate types Contingency allowance VS. management reserve Control cost Forecasting

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7.0 Project Cost Management Notes • Write down your personal goals to enhance your project time management knowledge and skills.

• Write down any newly acquired knowledge that you might be able to apply in your workplace.

• Identify additional resources.

• Read • PMBOK® Guide 2017, Ch. 7 (Project Cost Management) • Mulcahy, Ch.. 7 (Cost Management) • Kerzner, Ch.. 14, 15 (Pricing and Estimating, Cost Control) - Optional

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Tests • Rita’s practice exam – Ch.. 7