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Cost Management

Chapter 7 - PMBOK Guide

Frederick Fournier

on 10 October 2012

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Transcript of Cost Management

7 - Cost Management 7.1 - Estimate Costs
7.2 - Determine Budget
7.3 - Control Costs is the process involved in estimating, budgeting and controlling cost, so that the project can be completed within the approved budget. Process Groups
- Initiating
- Planning
~ Estimate Costs
~ Determine Budget
- Executing
- Monitoring / Cotrolling
~ Control Costs
- Closing 2 Important terms:
Life-Cycle Costing
Value Engineering Instead of simply asking "How much will this product cost to develop?" life-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 bigger picture of ownership costs.

Ex: Material life (quality), Cost of Waste... Value engineering is the practice of trying to get more
out of the project in every possible way. It tries 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 to value engineering is that the scope of work is not reduced by these other efforts. is produced by analyzing each schedule activity to evaluate the activity time estimates and the resource estimates associated with them.

Why it's important ?
Because in this process, you gain a detailed understanding of the costs involved in performing a project.

When it's performed ?
This process, like many others, may be performed over and again throughout the project; however, there are a few essential predecessor processes that must be completed before it can be performed adequately.

Costs are estimated against schedule activities, so the project's schedule has to be created first.

How it works ?
Cost estimates, prepared for each activity, are categorized in terms of their accuracy. Depending on the leeway or buffer we are giving yourself with the estimating.

Order of Magnitude (-50%to+100%)
Conceptual Estimate (-30% to +50%)
Preliminary Estimate (-20% to +30%)
Definitive Estimate (-15% to +20%)
Control Estimate (-10% to +15%)

Typically, the closer in time you get to actually spending money for an activity, the more precise you want that activity's estimate to be. Inputs Tools &
Techniques Outputs 1- Scope baseline
2- Project Schedule
3- Human resource plan
4- Risk register
5- Enterprise environmental factors
6- Organizational process assets 1- Expert judgment
2- Analogous estimate
3- Parametric estimate
4- Bottom-up estimate
5- Three-point estimate
6- Reserve analysis
7- Cost of Quality
8- Project management estimating software
9- Vendor bid analysis 1- Activity cost estimates
2- Basis of estimates
3- Project document updates What it is ?
In order to understand this process, it is necessary to understand what a budget is. A budget, also known as the cost performance baseline, takes the estimated project expenditures and maps them back to dates on the costs so that the performing organization will know how to plan for cash flow and likely expenditures.

Why it's important ?
A good cost performance baseline will help the organization plan its expenditures appropriately and will prevent the organization from tying up too much money throughout the life of the project.

When it's performed ?
Because the budget typically maps back to schedule activities, it should be performed after Define Activities, Estimate Activity Durations, and Estimate Activity Resources have been performed. Inputs Tools &
Techniques Outputs 1- Activity cost estimates
2- Basis of estimates
3- Scope baseline
4- Project schedule
5- Resource calendars
6- Contracts
7- Organizational process assets 1- Cost aggregation
2- Reserve analysis
3- Expert judgment
4- Historical relationships
5- Funding limit reconciliation 1- Cost Performance baseline
2- Project funding requirements
3- Project document updates What it is ?
in many ways, is the quintessential monitoring and controlling process. There are two important things to keep in mind about controlling processes:
They are proactive. They don't 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. If results don't match, then appropriate steps are taken to bring the two back in line.

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

When it's performed ?
Control Costs is not a process that is performed only once. Instead, it is performed regularly throughout the project, typically beginning as soon as project costs are incurred.

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

For instance, many projects will perform Control Costs monthly during planning phases and weekly during peak costs. Inputs Tools &
Techniques Outputs 1- Project management plan
2- Project funding requirements
3- Work performance information
4- Organizational process assets 1- Earned value management
2- Forecasting
3- To-complete performance index
4- Performance reviews
5- Variance analysis
6- Project management software 1- Work performance measurements
2- Budget forecasts
3- Organizational process assets updates
4- Change requests
5- Project management plan updates
6- Project document updates Example 1 You are constructing 6 additional rooms on an office building. Each of the six rooms is identical, and the projected cost for the project is $100,000 and is expected to take 5 weeks.

At the end of the 2nd week, you have spent $17,500 per room and have finished 2 rooms; you are ready to begin on the 3rd.

1. Based on the information provided in the example above, fill in the values for the following table:

BAC = $100,000 Planned Value (PV) = ?
Planned % Complete X
BAC PV = $40,000.00 Earned Value (EV) = ?
Actual % Complete X
BAC EV = $33,333.33 Actual Cost (AC) = ? AC = $35,000.00 Budgeted At
Completion (BAC) = ? Cost Variance (CV) = ?

Schedule Variance (SV) = ?

Cost Performance Index = ?

Schedule Perf. Index = ?

Estimate At Completion = ?

Estimate To Completion = ?

Variance At Completion = ?

To-Complete Perf. Index = ?
TCPI = (BAC - EV) / (BAC - AC) CV = -$1,666.67

SV = -$6,666.67

CPI = 0.95

SPI = 0.83

EAC = $105,263.15

ETC = $70,263.15

VAC = -$5,263.15

TCPI = 1.03 Hints to Remember:

EV comes first in every formula
If it's VARIANCE, the formula is EV - something
if it's INDEX, EV / something
if it relates to COST, use AC
if it relates to SCHEDULE, use PV
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