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Project cost & control
- 1. How Do We Manage Cost? Three processes Cost Estimating Cost Budgeting Cost Control Cost Estimating Cost Budgeting Cost Control The process involved in estimating, budgeting, and controlling cost so that the project can be completed within approved budget Project Cost Management
- 2. Project Cost Estimation Project cost estimation is the process of developing an approximation of the monetary resources needed to complete project activities. Cost estimates are a prediction that is based on the information known at a given point in time.
- 3. Cost Estimating Enterprise Environmental Factors Organizational Process Assets Project Scope Statement Analogous estimating Bottom up estimating Parametric estimating Three- Points estimate Project management software Vendor bid analysis Reserve analysis Cost of quality Inputs OutputsTools & Techniques Work Breakdown Structure WBS Dictionary Cost Estimating Cost Budgeting Cost Control Project Management Plan •Schedule Mgmt Pln •Staffing Mgmt Pln •Risk Register Activity Cost Estimates Activity Cost Estimates Supporting Detail Requested Changes Cost Management Plan Updates
- 4. Analogous estimating Bottom up estimating Parametric estimating Three- Points estimate Project management software Vendor bid analysis Reserve analysis Cost of quality
- 5. Types of Cost Estimates Type of Estimate When Done Why Done How Accurate Rough Order of Magnitude (ROM) Very early in the project life cycle, often 3–5 years before project completion Provides rough ballpark of cost for selection decisions –25%, +75% Budgetary Early, 1–2 years out Puts dollars in the budget plans –10%, +25% Definitive Later in the project, < 1 year out Provides details for purchases, estimate actual costs –5%, +10%
- 6. 6www.ciklum.net Cost Baseline Cost performance baseline is a time-phased budget used to measure, monitor and control cost performance over the project. Determine Budget Process of aggregating the estimated cost of individual activities or work packages to establish an authorized cost baseline
- 7. Cost control: Cost control: controlling changes to the project budget . Earned value management is an important tool for cost control
- 8. 8 Earned Value Management (EVM) EVM is a project performance measurement technique that integrates scope, time, and cost data. Given a baseline (original plan plus approved changes), you can determine how well the project is meeting its goals. You must enter actual information periodically to use EVM. More and more organizations around the world are using EVM to help control project costs.
- 9. 9www.ciklum.net Earned Value Management Planned Value, Earned Value, Actual Costs Variances Performance Indices
- 10. Earned Value Formulas NAME FORMULA NOTES Cost Variance (CV) EV-AC Negative = Over budget Positive = Under budget Schedule Variance (SV) EV-PV Negative = Behind Schedule Positive = Ahead of Schedule Cost Performance Index (CPI) EV/AC How much are we getting for every dollar we spend? Schedule Perform Index (SPI) EV/PV Progress as % against plan Estimate to Complete (ETC) EAC-AC How much more do we have to spend? Variance at Completion (VAC) BAC-EAC At the end of the day, how close will we be to plan? Estimate at Completion (EAC) See following slide
- 11. Earned Value Formulas (Cont’d) NAME FORMULA NOTES Estimate at Completion (EAC) BAC/CPI Use if no variances from BAC have occurred AC+ATC Use when original estimate was bad. Actuals + New estimate AC+BAC-EV Use when current variances are not expected to be there in the future AC+(BAC-EV)/CPI Use when current variances are expected to continue
- 13. 13 Figure 7-5. Earned Value Chart for Project after Five Months If the EV line is below the AC or PV line, there are problems in those areas.
- 14. Earned Value Chart The chart helps visualize how the project is performing. If the project goes as planned, it will finish in 12 months at a cost of $100,000 The actual cost line is always right on or above the earned value line. Interpretation: This means costs are equal to or more than planned The planned value line is pretty close to the EV line, just slightly higher in the last month Interpretation: The project has been right on schedule until last month when the project fell behind schedule
- 15. PV, EV, AC
- 16. Variances • CV (Cost Variance): difference between the budgeted cost of an activity and the actual cost of that activity. CV = EV – AC • SV (Schedule Variance): difference between the scheduled completion of an activity and the actual completion of the activity. SV = EV – PV
- 17. 1 7www.ciklum.net Performance Indices • CPI (Cost Performance Index): The cost-efficiency factor representing the relationship between the actual costs expended and the value of the physical work performed. CPI = EV/AC • SPI (Schedule Performance Index): The schedule efficiency ratio of earned value accomplished against the planned value. The SPI describes what portion of the planned schedule was actually accomplished. SPI = EV/PV
- 18. 1 8www.ciklum.net Forecasting • Budget at Completion (BAC) • Forecasted Estimate at Completion (EAC) at the budgeted rate EAC = BAC + AC – EV • Forecasted Estimate at Completion (EAC) at the present CPI EAC = BAC / CPI • To-Complete Performance Index (TCPI) – projection of cost performance that must be achieved on the remaining to meet a specified goal (BAC – EV) / (BAC – AC)
Editor's Notes
- #5: Funding requirements – “triggers” to fund the project.
- #6: LC Costing – looking at the cost of the whole lifecycle of the product, not only cost of the projectValue Analysis – finding a less costly way to do the same workCost Risk
- #7: Funding requirements – “triggers” to fund the project.
- #8: LC Costing – looking at the cost of the whole lifecycle of the product, not only cost of the projectValue Analysis – finding a less costly way to do the same workCost Risk
- #9: LC Costing – looking at the cost of the whole lifecycle of the product, not only cost of the projectValue Analysis – finding a less costly way to do the same workCost Risk
- #10: LC Costing – looking at the cost of the whole lifecycle of the product, not only cost of the projectValue Analysis – finding a less costly way to do the same workCost Risk