Cost Management

Post on: 16 Март, 2015 No Comment

The PMBOK phases of Project Cost Management: Resource Planning, Cost Estimating, Cost Budgeting, and Cost Control (Be familiar with Input, Tools and Techniques, and Output for each phase)
Cost Estimates and Ranges: Order of Magnitude, Budgetary, and Definitive
Earned Value Analysis: BCWP, BCWS, ACWP, EAC, BAC, ETC, CV, SV, CPI, SPI
Cost Estimating Techniques: analogous, parametric, and bottom-up
Present Value and Net Present Value
Straight-Line, Double Declining Depreciation and Sum of Yrs Digits

Key Definitions

Baseline The original plan plus or minus approved changes.

Budget At Completion (BAC) The estimated total cost of the project when done.

Budgeted Cost of Work Performed (BCWP) The sum of the approved cost estimates for activities completed during a given period (usually project-to-date).

Budgeted Cost of Work Scheduled (BCWS) The sum of the approved cost estimates for activities scheduled to be performed during a given period.

Chart of Accounts Any numbering system used to monitor project costs by category (e.g. labor, supplies, materials). The project chart of accounts is usually based upon the corporate chart of accounts of the primary performing organization.

Code of Accounts Any numbering system used to uniquely identify each element of the WBS.

Contingency Reserve A separately planned quantity used to allow for future situations which may be planned for only in part (known unknowns). Contingency reserves are intended to reduce the impact of missing cost or schedule objectives. Contingency reserves are normally included in the project’s cost and schedule baselines.

Cost Budgeting Allocating the cost estimates to individual project components.

Cost Control Controlling changes to the project budget.

Cost Estimating Estimating the cost of the resources needed to complete project activities.

Cost Performance Index (CPI) The ratio of budgeted costs to actual costs (BCWP / ACWP). CPI is often used to predict the magnitude of a possible cost overrun using the following formula: original cost estimate/CPI = projected cost at completion.

Cost Variance (CV) Any difference between the estimated cost of an activity and the actual cost of that activity. In earned value, CV = BCWP-ACWP.

Earned Value

A method for measuring project performance. It compares the amount of work that was planned with what was actually accomplished to determine if cost and schedule performance is as planned.
The BCWP for an activity or group of activities.

Definition (1) is also called Earned Value Analysis.

Estimate at Completion (EAC) The expected total cost of an activity, a group of activities, or of the project when the defined scope of work has been completed. Most techniques for forecasting EAC include some adjustment of the original cost estimate based on project performance to date.

EAC = Actuals-to-date + ETC.

(Also known as Forecast Final Cost)

Estimate To Complete (ETC) The expected additional cost needed to complete an activity, a group of activities, or the project. Most techniques for forecasting ETC include some adjustment to the original cost estimate based on project performance to date.

Fixed Costs Costs that do not change based on the number of units. These costs are nonrecurring.

Life Cycle Costing The concept of including acquisition, operating, and disposal costs when evaluating various alternatives. Also known as the total cost of ownership.

Management Reserve A separately planned quantity used to allow for future situations which are impossible to predict. (unknown unknowns) Management reserves are intended to reduce the risk of missing cost or schedule objectives. Use of management reserves requires a change to the project’s cost baseline.

Parametric Estimating An estimating technique that uses a statistical relationship between historical data and other variables to calculate an estimate.

Payback Period The number of time periods up to the point at which cumulative revenues exceed cumulative costs and, therefore, the project has turned a profit.

Percent Complete (PC) The percentage of the amount of work which has been completed on an activity or group of activities.

Project Cost Management A subset of project management that includes the processes required to ensure that the project is completed within the approved budget.

Schedule Performance Index (SPI) The ratio of work performed to work scheduled. (BCWP / BCWS)

Schedule Variance (SV) Any difference between the scheduled completion of an activity and the actual completion of that activity. In earned value, BCWP — BCWS.

Value Analysis A cost-reduction tool that involves careful analysis of a design or item to identify all the functions and the cost of each. It considers whether the function is necessary and whether it can be provided at a lower cost without degrading performance or quality.

Working Capital Current assets minus liabilities.

Cost Management Processes

Resource Planning

The process of determining what physical resources and what quantities of each should be used to perform project activities.
Input includes . WBS, historical information, scope statement, resource pool description, and organizational policies.
Methods used .

Expert judgment: consultants, professional and technical associations, industry groups, other units within the performing organization.
Alternatives identification: Any technique such as brainstorming and lateral thinking used to generate different approaches to the project.

Output includes: Resource requirements — a description of what types of resources are required and in what quantities for each element of the WBS.

Cost Estimating:

The process of developing an estimate of the costs of the resources needed to complete project activities.

Input includes: WBS, resource requirements, resource rates, activity duration estimates, historical information, chart of accounts.

Methods used .

Analogous estimating . (top down estimating) Uses the actual cost of a previous similar project as the basis for estimating the cost of the current project. Analogous estimating is frequently used to estimate total project costs when there is a limited amount of detailed information about the project. (e.g. in the early project phases) It is generally less costly than other estimating techniques, but it is also generally less accurate. Most reliable when 1) the previous projects are similar in fact and not just in appearance, 2) the individuals or groups preparing estimates have the needed expertise.

Parametric modeling . Uses project characteristics (parameters) in a mathematical model to predict project costs. Models may be simple or complex. Most reliable when 1) the historical information used to develop the model was accurate, 2) the parameters used in the model are readily quantifiable, and 3) the model is scalable.

Bottom-up estimating . Involves estimating the cost of individual work items, then summarizing or rolling-up the individual estimates to get a project total. The cost and accuracy of bottom-up estimating is driven by the size of the individual work items: smaller work items increase both cost and accuracy. The project management team must weigh the additional accuracy against the additional cost.

Computerized tools . Project management software and spreadsheets can assist with cost estimating.

Output includes . cost estimates, supporting detail, and the cost management plan. The cost management plan describes how cost variances will be managed. It is a subsidiary element of the overall project plan.

The process of allocating the overall cost estimates to individual work items in order to establish a cost baseline for measuring project performance.

Input includes . cost estimates, WBS, and project schedule.

Methods used . cost estimating tools and techniques.

Output includes . Cost baseline — a time-phased budget used to measure and monitor cost performance. It is developed by summing estimated costs by period and is usually displayed in the form of an S-curve.

Cost Control

The process of:

Influencing the factors which create changes to the cost baseline to ensure that changes are beneficial

Determining that the cost baseline has changed

Managing the actual changes when and as they occur.

Cost control includes:

Monitoring cost performance to detect variances from plan.

Ensuring that all appropriate changes are recorded accurately in the cost baseline.

Preventing incorrect, inappropriate, or unauthorized changes from being included in the cost baseline.

Informing appropriate stakeholders of authorized changes.

Input includes . cost baseline, performance reports, change requests, and cost management plan

The methods used in cost control include .

Cost change control system . Defines the procedures by which the cost baseline may be changed. Includes the paperwork, tracking system and approval levels necessary for authorizing changes. (should be integrated with the overall change control system)

Performance measurements . Used to access the magnitude of any variations which do occur. (example: earned value analysis)

Additional planning . Prospective changes may require new or revised cost estimates or analysis of alternative approaches.

Computerized tools

Output from cost control . revised cost estimates, budget updates, corrective action, estimate at completion (EAC), and lessons learned.

Cost Management Concepts

Estimates

Order of Magnitude

Range: -25% + 75%

An approximate estimate made without detailed data

Used during the initial evaluation of the project (Concept)

Other terms: SWAG, feasibility, conceptual, ball park

Budget

Range: -10% + 25%

Used to establish the funds required for the project (Development)

Also used to obtain approval for the project

Other terms: appropriations

Definitive

Range: -5% + 10%

Prepared from well defined specifications, data, drawings, etc.

Used for bid proposals, bid evaluations, contract changes, extra work, legal claims, permit and government approvals.

Cost Estimating vs. Pricing

Cost Estimating involves developing an assessment of how much it will cost the performing organization to provide the product or service.
Pricing is a business decision — how much the performing organization will charge for the product or service.

Life Cycle Costing

Project Cost Management is primarily concerned with the cost of the resources needed to complete the project.
A broader view of Project Cost Management is Life Cycle Costing.

Life Cycle Costing includes acquisition, operating, maintenance, and disposal costs.
Project Cost Management should consider the effect of project decisions on the cost of using the project product. (i.e. limiting the number of design reviews may reduce the cost of the project but increase the product maintenance costs and customer operating costs.)

Cost Types

Sunk Costs . A historical or expended cost. Since the cost has been expended, we no longer have control over the cost. Sunk costs are not included when determining alternative courses of action.
Fixed Costs . Nonrecurring costs that do not change based on the number of units.
Variable Costs . Costs that rise directly with the size of the project.
Indirect Costs . Costs that are part of the overall organization’s cost of doing business and are shared among all the current projects.
Opportunity Costs . The cost of choosing one alternative and, therefore, giving up the potential benefits of another alternative.
Direct Costs . Costs incurred directly by a specific project.

Depreciation

Straight-line Method: Takes an equal credit during each year of the useful life of an asset.
Accelerated Method: Writes off the expense even faster than straight-line.