Project Cost Management

Lecture # 10

Project Cost Management

Includes the processes involved in planning, estimating,

budgeting, financing, funding, managing, and controlling costs
so the project can be completed within the approved budget.

• Plan Cost Management

• Estimate Costs
• Determine Budget
• Control Costs

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 Plan Cost Management
Plan Cost Management is the process of defining how the project costs will be
estimated, budgeted, managed, monitored, and controlled. The key benefit of this
process is that it provides guidance and direction on how the project costs will be
managed throughout the project. This process is performed once or at
predefined points in the project.

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 Enterprise Environmental Factors
The enterprise environmental factors that can influence the Plan Cost Management process
include but are not limited to:
• Organizational culture and structure can influence cost management.
• Market conditions describe what products, services, and results are available in the
regional and global markets.
• Currency exchange rates for project costs are sourced from more than one country.
• Published commercial information such as resource cost rate information is often
available from commercial databases that track skills and human resource costs, and
provide standard costs for material and equipment. Published seller price lists are another
source of information.
• Project management information system provides alternative possibilities for managing
cost.
• Productivity differences in different parts of the world can have a large influence on the
cost of projects.
Organizational Process Assets
The organizational process assets that can influence the Plan Cost Management process
include but are not limited to:
• Financial controls procedures (e.g., time reporting, required expenditure and
disbursement reviews, accounting codes, and standard contract provisions);
• Historical information and lessons learned repository;
• Financial databases; and
• Existing formal and informal cost estimating and budgeting-related policies,
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procedures, and guidelines.
 Output: Cost Management Plan
The cost management plan can establish the following:
Units of measure. Each unit used in measurements (such as staff hours, staff days, or
weeks for time measures; meters, liters, tons, kilometers, or cubic yards for quantity
measures; or lump sum in currency form) is defined for each of the resources.
Level of precision. This is the degree to which cost estimates will be rounded up or
down (e.g., US$995.59 to US$1,000), based on the scope of the activities and
magnitude of the project.
Level of accuracy. The acceptable range (e.g., ±10%) used in determining realistic
cost estimates is specified, and may include an amount for contingencies.
Organizational procedures links. The work breakdown structure (WBS) provides the
framework for the cost management plan, allowing for consistency with the estimates,
budgets, and control of costs. The WBS component used for the project cost
accounting is called the control account. Each control account is assigned a unique
code or account number(s) that links directly to the performing organization’s
accounting system.
Control thresholds. Variance thresholds for monitoring cost performance may be
specified to indicate an agreed-upon amount of variation to be allowed before some
action needs to be taken. Thresholds are typically expressed as percentage deviations
from the baseline plan.
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 Costs Estimate
Estimate Costs is the process of developing an approximation of the cost of
resources needed to complete project work. The key benefit of this process is that
it determines the monetary resources required for the project. This process is
performed periodically throughout the project as needed. The inputs, tools and
techniques, and outputs of this process are depicted in Figure.

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 Project estimation: Tools and techniques
1.Expert Judgment: The best place to get project estimating data is from a technical
subject matter expert.  Of course, they would have the experience to tell what range the
estimate should be, and provide excellent guidance to ensure each piece is estimated
accurately. 
2.Analogous estimating: This type of estimating involves comparisons to other, similar
projects or project components.  Most organizations perform projects that are similar to
other projects within the organization, or know the costs of projects performed by other
organizations.  The actual costs can be scaled on the basis of known differences to arrive at
the estimate for the new project
3.Parametric estimating: This involves starting with a unit cost and scaling it up to the
number of units required.  Most industries have public knowledge banks that publish cost
data, for example, the cost per square foot to build a house in various cities.  The
parametric value can also originate in-house, if many of those types of projects have been
completed.
4.Bottom-up Estimating: A method of estimating a component of work. The cost of
individual work packages or activities is estimated to the greatest level of specified detail.
The detailed cost is then summarized or “rolled up” to higher levels for subsequent
reporting and tracking purposes.
5.Three point estimating: It is often intuitive to determine an optimistic and pessimistic
value. Three point estimating uses those values to “skew” the estimate if there is higher
upside or downside risk, or if the estimator wishes to introduce a skew to account for risk.
The estimator chooses a Most Likely estimate (normal) as well as an Optimistic and 7
Pessimistic value.  These can be averaged using the triangular distribution:
 Determine Budget
Determine Budget is the process of aggregating the estimated costs of individual activities
or work packages to establish an authorized cost baseline. The key benefit of this process
is that it determines the cost baseline against which project performance can be monitored
and controlled. This process is performed once or at predefined points in the project.
A project budget includes all the funds authorized to execute the project. The cost baseline
is the approved version of the time-phased project budget that includes contingency
reserves, but excludes management reserves.

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 Control Costs
Control Costs is the process of monitoring the status of the project to update the
project costs and managing changes to the cost baseline. The key benefit of this
process is that the cost baseline is maintained throughout the project. This process is
performed throughout the project. The inputs, tools and techniques, and outputs of
this process are depicted in Figure.

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Because each project is unique, the project manager may need to tailor the
way Project Cost Management processes are applied. Considerations for
tailoring include but are not limited to:

• Knowledge management. Does the organization have a formal

knowledge management and financial database repository that a project
manager is required to use and that is readily accessible?
• Estimating and budgeting. Does the organization have existing formal
or informal cost estimating and budgeting-related policies, procedures,
and guidelines?
• Earned value management. Does the organization use earned value
management in managing projects?
• Use of agile approach. Does the organization use agile methodologies
in managing projects? How does this impact cost estimating?
• Governance. Does the organization have formal or informal audit and
governance policies, procedures, and guidelines?

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CONSIDERATIONS FOR AGILE/ADAPTIVE ENVIRONMENTS
Projects with high degrees of uncertainty or those where the scope is not
yet fully defined may not benefit from detailed cost calculations due to
frequent changes. Instead, lightweight estimation methods can be used to
generate a fast, high-level forecast of project labor costs, which can then be
easily adjusted as changes arise. Detailed estimates are reserved for short-
term planning horizons in a just-in-time fashion.
In cases where high-variability projects are also subject to strict budgets,
the scope and schedule are more often adjusted to stay within cost
constraints.

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 Trends And Emerging Practices In Project Cost Management

Within the practice of Project Cost Management, trends include the

expansion of earned value management (EVM) to include the concept of
earned schedule (ES).

ES is an extension to the theory and practice of EVM. Earned schedule

theory replaces the schedule variance measures used in traditional EVM
(earned value − planned value) with ES and actual time (AT). Using the
alternate equation for calculating schedule variance ES − AT, if the amount
of earned schedule is greater than 0, then the project is considered ahead of
schedule. In other words, the project earned more than planned at a given
point in time. The schedule performance index (SPI) using earned schedule
metrics is ES/AT. This indicates the efficiency with which work is being
accomplished. Earned schedule theory also provides formulas for
forecasting the project completion date, using earned schedule, actual time,
and estimated duration.
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Lecture # 11

Cost management Process

• Plan cost management: establishes the policies, procedures, and
documentation for planning, managing, expending, and controlling
project costs
• Estimate costs: an approximation of the monetary resources needed to
complete project activities
• Determine budget: aggregating the estimated costs of individual
activities or work packages to establish an authorized cost baseline
• Control costs: monitoring the status of the project to update the
project costs and managing changes to the cost baseline

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 What is Cost and Project Cost Management?
• Cost is a resource sacrificed or foregone to achieve a
specific objective or something given up in exchange
• Costs are usually measured in monetary units like
dollars
• Project cost management includes the processes required
to ensure that the project is completed within an
approved budget

Classification of project costs

• Direct Vs. Indirect
• Recurring Vs. Nonrecurring
• Fixed Vs. Variable
• Normal Vs. Expedited
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 Direct Vs. Indirect
• Direct costs- can be directly charged against the project; for example, the
costs of personnel who are directly involved in the project, or the costs of
materials directly used for project work
• Indirect costs- include overhead, as well as selling and administrative
expenses Examples of overhead costs include costs associated with taxes,
insurance, utilities, and so forth. Costs associated with selling and
administrative expenses, commissions, advertising, etc.

Recurring Vs. Nonrecurring

• Recurring costs- such as labor and materials, are repeatedly incurred
throughout the project life cycle
• Nonrecurring costs- are one-time costs that are typically incurred at the
beginning or at the end of the project, such as market research and labor
training.

Fixed Vs. Variable

• Fixed costs- do not vary with usage. Example, costs incurred in the purchase
of capital equipment remain fixed, regardless of the extent of equipment use
• Variable costs- vary directly with usage. They are typically associated with
labor and materials 15
 Normal Vs. Expedited
• Normal costs- are incurred when project tasks are completed according to
the original planned duration
• Expedited costs- or crash costs are unplanned costs incurred as a result of
steps taken to accelerate project completion Example, costs associated with
using additional overtime or hiring additional workers specifically to hasten
project completion can be regarded as expedited costs

Tangible Vs. Intangible costs

• Tangible costs or benefits are those costs or benefits that an organization
can easily measure in dollars.
• Intangible costs or benefits are costs or benefits that are difficult to
measure in monetary terms.

Sunk cost
• Sunk cost is money that has been spent in the past; when deciding what
projects to invest in or continue, you should not include sunk costs.

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 Ballpark estimates
• Also known as ‘‘order of magnitude’’ estimates, often used when
there is not sufficient information or time available
• Typically, used for making competitive bids for project contracts, or
for initial rough-cut estimates of resources needed for a project
• As a general rule, ballpark estimates should attempt an accuracy of
±30 percent

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 Feasibility estimates
• Are developed after preliminary project design work is completed
• Are often used in construction projects, where published information on material
costs is widely available
• As more relevant information becomes available further down the project life cycle,
the ±10 percent margin of error
Definitive estimates
• Can be developed only after the completion of most design work
• Clear understanding of the scope and capabilities of the project, changes to project
specifications are virtually nonexistent
• Developed further down the project life cycle with more accurate information and
fewer project uncertainties, provide a much more accurate expected cost of the project
at completion, with a ±5 percent margin of error.
Comparative estimates
• Uses historical data from previous project activities as the frame of reference for
current estimates
• One of the method is parametric estimation-most projects are similar to previous
projects by way of similar features or parameters and, therefore, are likely to incur
similar costs. Steps:
– Identifying the features/parameters of an older or well-known project that can be
directly related to the cost of the current project
– Defining the mathematical nature of that relationship 19
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To illustrate the concept of EVM and all the formulas, assume a project that has exactly one task.
The task was baselined at 8 hours, but 11 hours have been spent and the estimate to complete is 1
additional hour. The task would have been completed already.
Assume an Hourly Rate of $100 per hour.

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Rules of performance measurement. Earned value management (EVM) rules of
performance measurement are set. For example, the cost management plan may:
• Define the points in the WBS at which measurement of control accounts will be
performed;
• Establish the EVM techniques (e.g., weighted milestones, fixed-formula, percent
complete, etc.) to be employed; and
• Specify tracking methodologies and the EVM computation equations for
calculating projected estimate at completion (EAC) forecasts to provide a
validity check on the bottom-up EAC.
Reporting formats. The formats and frequency for the various cost reports are
defined.
Additional details. Additional details about cost management activities include but
are not limited to:
Description of strategic funding choices,
Procedure to account for fluctuations in currency exchange rates, and
Procedure for project cost recording.

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Lecture # 12

Project Earned Value Management

What is Earned Value Management

Earned Value Management (EVM) is comprised of several

formulas that provide an analysis of a project and its current
state regarding budget and schedule.

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Actual Cost (AC)
The actual amount of money spent at a given point

Planned Value (PV)

The value of the work that should have been completed at any
given point for the total project to remain on budget and
schedule

PV = (Planned Percentage Completed) Multiplied by the

Budget At Completion (BAC)

Budget At Completion (BAC)

The Planned Expected Costs to Complete the Project
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Earned Value (EV)
The estimated value of the work completed at any given point

EV = (Actual Percentage Completed) X BAC

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 Cost Variance (CV)
The difference between the Earned Value (EV) and the Actual Cost (AC) that
shows how much ahead or behind in the budget the project is at any given point

A negative CV is the amount the project is over budget

A positive CV is the amount the project is under budget

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 Cost Performance Index (CPI)
An indicator into the speed or rate of spending compared to the value being generated (Is the
project budget on track)
CPI less than 1 shows the project is spending too fast and is over budget
CPI equal to 1 shows the project budget is on track
CPI greater than 1 shows the project is under budget
Cost Performance Index = Earned Value Divided by Actual Cost

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 Schedule Variance (SV)
The difference between the planned work completed versus the amount of work that
was completed
A negative SV is an estimate of how much the project is behind schedule
A positive SV is an estimate of how much the project is ahead of schedule
Schedule Variance = Earned Value – Planned Value

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 Schedule Performance Index (SPI)
The indicator into the speed or rate of the work being getting completed compared to the work
that was expected to be completed
SPI less than 1 shows the project as being behind schedule
SPI equal to 1 shows the project as being on track
SPI greater than 1 shows that the project is ahead of schedule
Schedule Performance Index = Earned Value divided by Planned Value

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 Estimate At Completion (EAC)
• Based on the current spending rate, EAC is an estimate of how much it will
actually cost to complete the whole project
• EAC = BAC/CPI

Estimate To Completion (ETC)

• Based on the current spending rate, ETC is an estimate of how much it will
actually cost from a specified point forward to complete the project; it is
simply the EAC minus the current actual costs
• ETC = EAC – AC

Variance At Completion (VAC)

• The difference between the planned budget (BAC) and the new forecast
budget (EAC)
• VAC = BAC – EAC

To-Complete Performance Index

• An estimate of how hard it would be to meet the project’s objectives
• TCPI (BAC – EV)/(BAC – AC)
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Performance Measurement

 History
 Balance Score Approach

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 Balance Score
Approach
The balanced scorecard refers to a performance
strategy that seeks to achieve a balance between
financial and non-financial performance across short-
term and long-term time horizons.

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