Project Cost Management Project Cost Processes Process Project

Project Cost Management

Project Cost Processes Process Project Phase Estimate Costs Planning Determine Budget Planning Monitoring and Control Costs Controlling Key Deliverables Activity Cost Estimates, Basis of estimates Cost performance baseline Work performance measurements

Estimating Costs ◦ Not the same as pricing! ◦ Builds on Work Breakdown Structure (WBS) ◦ Requires predicting what resources are needed and in what quantity (how many units): People Stuff Services ◦ Requires knowing how much each resource costs per unit ◦ Requires organizing costs into categories

Factors Influencing the Quality of Estimates Planning Horizon Other (Nonproject) Factors Organization Culture Padding Estimates Project Duration Quality of Estimates People Project Structure and Organization

Estimating Guidelines for Times, Costs, and Resources 1. Have people familiar with the tasks make the estimate. 2. Use several people to make estimates. 3. Base estimates on normal conditions, efficient methods, and a normal level of resources. 4. Treat each task as independent, don’t aggregate. 5. Don’t make allowances for contingencies. 6. Adding a risk assessment helps avoid surprises to stakeholders.

Four Categories of Costs ◦ Direct costs: Attributed directly to the project work and cannot be shared with other projects or activities, they are clearly chargeable to a specific work package ◦ Indirect costs: Shared costs, some portion of which can be attributed to the project, they are services, and costs, for your entire firm, not just one product. (e. g. use of a training room, also called overhead) ◦ Variable costs: Costs that vary according to some quantifiable condition – number of people, number of days, volume of material, supply/demand, etc. ◦ Fixed costs: Costs that remain the same, regardless of activity level, number of people, volume, etc.

“Value Engineering” ◦ Simply means finding the most efficient way to do the project – balancing cost Vs. quality Vs. time to maximize value. ◦ Can we reduce cost without sacrificing timeliness or quality? ◦ Use less expensive resources? Or more expensive resources but for shorter time?

Sources of Information ◦ Work Breakdown Structure (WBS) ◦ Estimating publications (e. g. State Department published per diems, Expedia. com) ◦ Organizational process assets, like project files, project review reports, team members’ experience, previous contracts, etc. ◦ Others?

Creating a Project Budget Assigning a cost to an individual work package

Budget Overview Project Cost to Date (a. k. a. ‘actual cost’) Variance Budget-At. Completion (BAC) Cost Baseline (a. k. a. ‘budget’) Project Schedule (Time)

Cost Control Focuses on the ability of costs to change and ways of allowing or preventing it from happening

Common Sense Cost Control Where do cost overruns come from? ◦ Mistakes and oversights – wrong or missing formulas or inputs ◦ Poor planning – inflation, other increases not factored into ◦ Lack of communication – staff don’t know ceiling amounts ◦ ‘Do-overs’ – poor quality delivery the first time around ◦ Scope creep – client wants something extra, boss agrees ◦ Other factors? in original budget estimates Prevent unauthorized changes to the cost baseline

Measuring Project Performance Measuring the performance of project work against a plan to identify variances

Earned Value Management (EVM) ◦ EVM is concerned with the relationships between the following that reflect project performance ◦ *Planned Value (PV – not ‘present value’!): What the project should be worth at a particular point in the schedule. ◦ Earned Value (EV): Budgeted value of work actually completed at a given point in time. ◦ Actual Cost (AC): Real dollars actually spent to date at a given point in time on the project. Can be (and usually is) different than EV. *also called performance baseline

EV, AC and PV BAC = $100, 000 Total Project 25% Complete Earned Value %COMP X BAC $25, 000 Month 6 = 50% Actual Costs How Much was actually Spent? $27, 000 Planned Value What the project should be worth At this point in the schedule period $50, 000

Finding Variances ◦ Cost Variance (CV): Difference between earned value (EV) and actual cost (AC). CV=EV-AC Remember – a negative variance is expressed with a negative sign (AC is greater than EV) Describes whether the work done so far has cost more or less than you thought it would. ◦ Schedule Variance (SV): Difference between earned value (EV) and planned value (PV). SV=EV-PV Remember – a negative variance is expressed with a negative sign (PV is greater than EV) Describes whether you’ve done as much work at this stage as you thought you would.

Cost Performance Index (CPI) ◦ Measures how much work each dollar of cost ‘buys’. ◦ CPI = Earned Value / Actual Cost. ◦ A CPI of. 75 means it costs $1 to generate 75 cents worth of work. Ideally, CPI should be 1. The smaller it is, the worse the project is doing. ◦ What if a CPI is more than 1? ◦ What would cause the CPI for the Sister Cities project to be less than 1? More than 1?

Schedule Performance Index (SPI) ◦ Measures how closely the project is on schedule. ◦ SPI = Earned Value / Planned Value. ◦ A SPI of. 75 means the project has only completed 75% of the work we expected to complete by now. ◦ Ideally, SPI should be 1. The smaller it is, the further behind the project is. ◦ What if an SPI is more than 1? ◦ What would cause the SPI for the Sister Cities project to be less than 1? More than 1?

Estimate to Complete (ETC) ◦ Measures how much more money is need to complete the project. Depends on Estimate at Completion (EAC) ◦ EAC is an updated ‘hypothesis’ (guess? ) of what the total actual cost of the project is likely to be. ◦ Easiest way (for predictable conditions) is EAC = BAC/CPI. (Dividing by a decimal makes BAC bigger) ◦ Other formulae (p. 268) account for typical variances and anomalies (known and unknowns). ◦ Estimate to Complete is EAC minus AC: Total project cost less the amount spent so far.

Earned Value Management: Tips 1. Always start with Earned Value (EV). 2. Variance means subtraction (dollar figure). 3. Index means division (decimal or percentage). 4. Negative dollar figures are bad in a variance. 5. Less than 1 (or 100%) is bad in an index.

Terms to Know Acronym Term PV Planned Value EV Earned Value AC Actual Cost (total cost) BAC EAC Budget at Completion (the budget) Estimate at Completion ETC Estimate to Complete VAC Variance at Completion Interpretation As of today, what is the estimated value of the work planned to be done? As of today, what is the estimated value of the work actually accomplished? As of Today, what is the actual cost incurred for the work accomplished? How much did we BUDGET for the TOTAL project effort? What do we currently expect the TOTAL project to cost (a forecast)? From this point on, how much MORE do we expect it to cost to finish the project (a forecast)? As of Today, how much over of under budget do we expect to be at the end of the project?

Formulas and Interpretations to Memorize Name Cost Variance (CV) Formula EV-AC Schedule Variance (SV) EV-PV Cost Performance Index (CPI)^10 EV/AC Schedule Performance Index (SPI) EV/ PV Interpretation NEGATIVE is over budget; POSTIVE is under budget. NEGATIVE is behind schedule; POSITIVE is ahead of schedule. We are getting $____ worth of work our of every $1 spent. Funds are or are not being used efficiently. We are (only) progressing at ___ percent of the rate originally planned.

Ten Golden Rules of Project Management Don’t bite off more then you can manage Get your ducks in a row Plan for Murphy Don’t put off until tomorrow Delegate, delegate CYA (Document) Keep your team in the loop Measure success Have a flexible strategy Learn from your mistakes