CHAPTER 7 Project Cost Management BUS 445 PROJECT

CHAPTER: 7 Project Cost Management BUS 445

PROJECT COST MANAGEMENT *Definition: Includes the processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget. *What will be Developed from Project Cost Management? • Plan Cost Management • Estimate Costs • Determine Budget • Control Costs

Plan Cost Management DEFINITION: The process that establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs.

Estimate Costs *Definition: The process of developing an approximation of the monetary resources needed to complete project activities. *Tools and Techniques: 1 -Analogous Estimating: projects as basis for the Uses the values of parameters or measures of scale from previous, similar current project. 2 - Parametric Estimating: Uses a statistical relationship between historical data and other variables to calculate an estimating for activity parameters. 3 - Bottom-up Estimating: Is a method of estimating a component of work, the cost of individual work packages with greatest level of specific detail.

Estimate Costs 4 - Three-Point Estimating: This concept originated with Program Evaluation and Review Technique (PERT). *PERT uses three estimates: - Most likely CM: The cost of the activity, based on realistic effort assessment for the required work - Optimistic CO : The activity cost based on analysis of the bestcase scenario for the activity. - Pessimistic CP : The activity cost based on analysis of the worst-case scenario for the activity *PERT analysis calculated an expected CE activity cost using the average of three estimating

Determine Budget • DEFINITION: The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline

Control Costs DEFINITION: The process of monitoring the status of the project to update the project costs and managing changes to the cost baseline. Tools and techniques: * Earned Value Management EVM: The basic premise of earned value management (EVM) is that the value of a piece of work is equal to the amount of funds budgeted to complete it. As part of EVM, you use the following information to assess your schedule and cost performance throughout your project.

Control Costs Planned value (PV): The approved budget for the work scheduled to be completed by a specified date; also referred to as the budgeted cost of work scheduled (BCWS). The total PV of a task is equal to the task’s budget at completion (BAC) — the total amount budgeted for the task. Earned value (EV): The approved budget for the work actually completed by the specified date; also referred to as the budgeted cost of work performed (BCWP). Actual cost (AC): The costs actually incurred for the work completed by the specified date; also referred to as the actual cost of work performed (ACWP).

Control Costs • To describe your project’s schedule and cost performance with EVM, you use the following indicators: *Schedule variance (SV): The difference between the amounts budgeted for the work you actually did and for the work you planned to do. The SV shows whether and by how much your work is ahead of or behind your approved schedule Schedule variance (SV) = Earned value (EV) – Planned value (PV) *Cost variance (CV): The difference between the amount budgeted and the amount actually spent for the work performed. The CV shows whether and by how much you’re under or over your approved budget. Cost variance (CV) = Earned value (EV) – Actual cost (AC) Example: PV = $50, the AC = $100, and the EV = $75. CV= EV – AC = 75 – 100 = (-25) and SV= EV-PV= 25

Control Costs *Schedule performance index (SPI): The ratio of the approved budget for the work performed to the approved budget for the work planned. The SPI reflects the relative amount the project is ahead of or behind schedule, sometimes referred to as the project’s schedule efficiency. You can use the SPI to date to project the schedule performance for the remainder of the task. Schedule performance index (SPI) = *Cost performance index (CPI): The ratio of the approved budget for work performed to what you actually spent for the work. The CPI reflects the relative value of work done compared to the amount paid for it, sometimes referred to as the project’s cost efficiency. You can use the CPI to date to project the cost performance for the remainder of the task. Cost performance index (CPI) =

Control Costs You can approximate the amount of time you’re behind or ahead of the approved schedule by drawing a line from the intersection of the EV and assessment date lines parallel to the x-axis to the PV line. Doing so suggests that the project being described by the graph is about one month behind schedule.

Example: Activity formulas Week 1 Earned value --------- 5, 000 Planned value (PV) --------- 10, 000 Actual cost (AC) ----------- 15, 000 Cost variance EV - AC - 10, 000 Schedule variance EV - PV -5, 000 Cost performance index (CPI): 33% Schedule performance index (SPI): 50%

We conclude that: ØCV = ( -10, 000) < 0 is negative : it means that performing the work cost more than planned. ØSV = (-5, 000) < 0 is negative : it means that it took longer than planned to perform the work. ØCPI = 0. 33 <1 so over budget ØSPI = 0. 5 <1 so behind schedule

Some rules Negative numbers for cost and schedule variance indicate problems in those areas. v If CV is negative it means that performing the work cost more than planned. v If SV is negative means that it took longer than planned to perform the work. v CPI can be used to estimate the projected cost of completing the project based on performance to date (EAC) CPI =1: the planned and actual costs are the same; CPI <1: over budget; CPI >1: under budget v. SPI can be used to estimate the projected time to complete the project SPI =1: on schedule; SPI <1 behind schedule; SPI >1 ahead of schedule