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Project Management from Simple to Complex

Project Management from Simple to Complex.

colette-hammond
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Project Management from Simple to Complex

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  1. Project Management from Simple to Complex

  2. This work is licensed under the Creative Commons Attribution-Noncommercial-Share Alike 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-sa/3.0/or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA

  3. Chapter 9Estimating and Managing Costs

  4. Learning Objectives • Describe methods of estimating costs • Identify the effects of project phase and complexity on the choice of estimating method • Describe the method of combining cost estimates with a schedule to create a budget • Describe methods to manage cash flow • Describe the terms and relationships of budget factors used in earned value analysis

  5. Learning Objectives • Calculate and interpret budget and schedule variances • Calculate and interpret the schedule performance index and the cost performance index • Calculate and interpret estimates to complete the project • Calculate the revised final budget

  6. Estimating Costs to Compare and Select Projects • Economic factors are an important consideration when choosing between competing projects • To compare the simple paybacks/internal rates of return between projects, an estimate of the cost of each project is made • The estimates must be accurate enough so that the comparisons are meaningful

  7. Estimating Costs to Compare and Select Projects • Compared to later phases, the methods of estimating project costs during the selection phase: • Are faster • Consume fewer resources • Rely on expert judgment of experienced managers • Expert judgment: Decisions based on incomplete information made by people who have extensive personal experience

  8. Estimating Costs to Compare and Select Projects • Analogous estimate:Budget estimate based on a similar project • Parametric estimate: Estimates that are calculated by multiplying measured parameters by cost-per-unit values

  9. Estimating Costs to Initiate Projects • Vendor bid analysis • An RFP is issued and sent to a list of qualified vendors • Vendors respond with a proposal and an estimate of the cost • The project management team reviews the vendor responses • The project selection decision might have to be reconsidered if: • Vendors’ estimates are much higher than expected • The project cannot be completed for the cost that was used to select the project

  10. Estimating Costs to Initiate Projects • Bottom-up estimating:Sum of estimates of each detail of the activity and project • Very accurate • Time-consuming • On projects with low complexity, the cost estimates can be done on spreadsheet software • On larger projects, software that manages schedules can manage and display costs by activity and category

  11. Figure 9.2 - Detailed Cost Estimate Click below to view full-size

  12. Figure 9.3 - Sum of Detailed Costs by Type Click below to view full-size

  13. Estimating Costs to Initiate Projects • Activity-based estimates • An activity can have costs from more than one vendor plus costs for labor and materials from internal sources • Detailed estimates from all sources are reorganized • Costs associated with a particular activity are grouped by adding the activity code to the detailed estimate

  14. Figure 9.4 - Detailed Costs Associated with Activities Click below to view full-size

  15. Estimating Costs to Initiate Projects • Establishing a Budget • Determine how much money is needed for: • Each group of tasks • The whole project • Cost aggregation: Sum of component costs • Transfer of money to the project account must be appropriately timed • Reconciliation:Matching funds provided with funds spent

  16. Figure 9.5 - Fund Transfers and Expenditures Click below to view full-size

  17. Managing the Budget • Funding for the project should be available when it is needed • Financial people prefer to keep the company’s money working in other investments before transferring it to the project account • The project manager prefers to have as much cash available as possible to use if activities exceed budget expectations

  18. Managing the Budget • Contingency reserve:Money held to pay for predictable but unspecified extra costs • Likely to be spent • Part of the total budget for the project • Management reserve:Money available for changing project scope • Not likely to be spent • Not part of the project’s budget baseline • Can be included in the total project budget

  19. Evaluating the Budget • Earned value management (EVM): Method of comparing the budgeted and actual costs of a project during the project • Budgeted cost of work scheduled (BCWS): All the items in the cost estimate • Planned value (PV): Sum of the items in the BCWS that should have been spent by a particular day • Budgeted cost of work performed (BCWP): The budgeted cost of work scheduled that has been done • Earned value (EV): Sum of budgeted expenses up to a particular point in the schedule • Actual cost (AC): Sum of money spent so far

  20. http://www.youtube.com/watch?v=7WsfuvHegxE&feature=related

  21. Figure 9.7 - Planned Value, Earned Value, and Actual Cost Click below to view full-size

  22. Evaluating the Budget • Schedule variance (SV): Difference between earned value and planned value • SV = EV − PV • A negative schedule variance means the project is behind schedule • Cost variance: Difference between earned value and actual cost • CV = EV − AC • A positive CV indicates the project is under budget

  23. Evaluating the Budget • Schedule performance index (SPI):Ratio of earned value to planned value • SPI = EV/PV • A SPI value less than one indicates the project is behind schedule • Cost performance index (CPI):Ratio of earned value to actual cost • CPI = EV/AC

  24. Evaluating the Budget • Estimate to complete (ETC): Estimate of the amount of money needed to complete the unfinished part of the project • Atypical cost variance • ETC = Budget at completion (BAC) − Earned value (EV) • Budget at completion: Budget for the entire project • Typical cost variance • ETC = (BAC – EV)/CPI • CPI: Cost performance index

  25. Evaluating the Budget • Estimate at completion(EAC): Revised project budget based on actual cost to date plus the estimate to complete (ETC) • EAC = AC + ETC

  26. Figure 9.9 - Summary of Terms and Formulas for Earned Value Analysis Click below to view full-size

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