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PROJECT COST MANAGEMENT PROCESSES

PROJECT COST MANAGEMENT PROCESSES. PMBOK Perspective. Plan Cost Management. Phases of Project Cost Management. Pre-Project Phase Project Implementation/Execution Phase Post Project Phase. Pre-Project Phase (Capital Budgeting). Project Cost Management Processes.

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PROJECT COST MANAGEMENT PROCESSES

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  1. PROJECT COST MANAGEMENT PROCESSES

  2. PMBOK Perspective

  3. Plan Cost Management

  4. Phases of Project Cost Management • Pre-Project Phase • Project Implementation/Execution Phase • Post Project Phase

  5. Pre-Project Phase (Capital Budgeting)

  6. Project Cost Management Processes • Cost estimating: Developing an approximation or estimate of the costs of the resources needed to complete a project. • Cost budgeting: Allocating the overall cost estimate to individual work items to establish a baseline for measuring performance. • Cost control: Controlling changes to the project budget.

  7. Types of Cost Estimates

  8. Plan Cost Management Establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs.

  9. Plan Cost Management Inputs Project Management Plan Project Charter Enterprise environmental factors Organizational process assets Tools & Techniques Expert judgment Analytical techniques Meetings Outputs Cost Management plan

  10. Inputs • Project Management Plan • Scope baseline • Schedule baseline • Other information (cost related scheduling, risk etc.) • Project Charter • Enterprise Environmental Factors • Organizational Process Assets

  11. Tools and Techniques Expert Judgment Analytical Techniques Meetings

  12. Outputs • Cost Management Plan • Units of Measure • Level of precision • Level of accuracy • Organizational procedures links • Control thresholds • Rules of Performance Management • Reporting Formats • Process Descriptions • Additional Details • Description of strategic funding choices • Procedure to account for fluctuations in currency exchange rates • Procedure for project cost recording

  13. Estimate Costs

  14. Estimate Costs Process of developing an approximation of the monetary resources needed to complete project activities.

  15. Inputs • Cost Management Plan • Human Resource Management Plan • Scope Baseline • Project Scope Statement • Work Breakdown Structure • WBS Dictionary • Project Schedule • Risk Register • Enterprise Environmental Factors • Organizational Process Assets

  16. Tools and Techniques • Expert Judgment • Guided by historical information it provides valuable insight about the environment and information from prior similar projects. • Variables such as labor rates, material costs, inflation, risk factors and others may be used for cost estimates. • Analogous Estimating • Previous similar project as an estimating basis for a current project • Estimating basis: values of parameters or measures of scale • Gross value estimating approach • Used when have limited amount of detailed information about a project • Less costly and time consuming but is also less accurate • Can be applied to total project or to segments in conjunction with other estimating methods

  17. Tools and Techniques(Contd…) • Parametric Estimating • Uses historical data and other variables to calculate estimates for activity parameters, such as cost, budget, duration • Technique produces higher levels of accuracy • Can be applied to total project or to segments in conjunction with other estimating methods • Bottom-Up Estimating • Used for estimating a component of work – individual work packages or activities • Greatest level of specified detail maintained • Rolled-up to higher levels for subsequent reporting and tracking

  18. Tools and Techniques (Contd…) • Three-Point Estimates • Estimation uncertainty and risk consideration for improved accuracy • Program evaluation and review technique (PERT) • PERT uses 3 estimates – Most likely (CM), Optimistic (CO), and Pessimistic (CP) to calculate an expected activity cost (CE) • Reserve Analysis • Contingency Reserves (sometimes called contingency allowances) are used to account for cost uncertainty • Contingency Reserves are part of the funding requirements • Cost of Quality • Assumptions about cost of quality may be used to prepare the activity cost estimate

  19. Tools and Techniques (Contd…) • Project Management Estimating Software • Applications, computerized spreadsheets, simulation, and statistical tools to aid cost estimating • Vendor Bid Analysis • Analysis of project cost based on the responsive bids from qualified vendors • Additional cost estimating work can be required to examine the price of individual deliverables and to derive a cost supporting the final total project cost • Group decision-making techniques

  20. Outputs • Activity Cost estimates • Quantitative assessment of the probable costs • Costs are estimates for all resources applied to the activity cost estimate • Basis of Estimates • Supporting documentation should provide a clear and complete understanding of how the cost estimate was derived • Supporting details for activity cost estimates may include: • Documentation of the basis of the estimate • Assumptions made • Known constraints if any • Indication of the range of possible estimates • Confidence level of the final estimate • Project Document Updates • Includes, but are not limited to, the risk register

  21. Determine budget

  22. Determine Budget • Process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline • Project budgets constitute the funds authorized to execute the project • Project cost performance is measured against the authorized budget

  23. Determine budget

  24. Inputs • Cost Management Plan • Scope Baseline • Project scope statement • Work breakdown structure • WBS dictionary • Activity Cost Estimates • Cost estimates for each activity within a work package are aggregated to obtain a cost estimate for each work package • Basis of Estimates • Project Schedule • Information can be used to aggregate costs to the periods in which they will be incurred

  25. Inputs (Contd…) • Resource Calendars • Provides information on which resources are assigned to the project and when they are assigned • Risk Register • Agreements • Applicable contract information and costs relating to products, services, or results that have been purchased are included when determining the budget • Organizational Process Assets • Include but are not limited to: • Existing formal and informal cost budgeting-related policies, procedures, and guidelines • Cost budgeting tools, and • Reporting methods

  26. Tools and Techniques • Cost Aggregation • Cost estimates are aggregated by work packages in accordance with the WBS • Work package cost estimates are then aggregated for the higher component levels of the WBS (such as control accounts) and ultimately for the entire project • Reserve Analysis • Establishes both contingency reserves and the management reserves • Expert Judgment • Historical Relationships • Based on historical relationships that result in parametric estimates • Use project characteristics (parameters) to develop mathematical models to predict total project costs

  27. Tools and Techniques (Contd…) • Historical Relationships • Based on historical relationships that result in parametric estimates • Use project characteristics (parameters) to develop mathematical models to predict total project costs • Reliable when: • Historical information used to develop the model is accurate • Parameters used are readily quantifiable • Models are scalable • Funding Limit Reconciliation • Reconcile expenditure of funds with funding limits • Variance may necessitate rescheduling of work to level out the rate of expenditures • Accomplished by placing imposed date constraints

  28. Outputs • Cost Baseline • Time-phased budget at completion (BAC) used to measure, monitor, and control overall project cost performance • Summation of the approved budgets by time period • In the earned value management technique it is referred to as performance measurement baseline (PMB)

  29. Outputs (Contd…) • Project Funding Requirements • Total and periodic funding requirements are derived from the cost baseline • Incremental amounts • Total funds required are those included in the cost baseline, plus management reserves, if any • Project Document Updates • Include but are not limited to Risk register, cost estimates, and project schedule

  30. Control costs

  31. 7.4 Control Costs • Process of monitoring the status of the project to update the project cost and managing changes to the cost baseline • Budget increase can only be approved through Perform Integrated Change Control process • Analyzing the relationship between the consumption of project funds to the physical work being accomplished for such expenditures • Management of cost performance baseline and changes to that baseline

  32. Control costs

  33. Inputs • Project Management Plan • Cost performance baseline: compared with actual results to determine if change, corrective or preventive action is necessary • Cost management plan • Project funding requirements • Work Performance Data • Project progress • Information on authorized and incurred costs • Project work completion estimates • Organizational Process Assets • Existing formal and informal cost control-related policies, procedures and guidelines • Cost control tools • Monitoring and reporting methods to be used

  34. What is Earned Value? How does Dilbert know this?

  35. What is Earned Value? • Earned Value Management (EVM) is a methodology that combines scope, schedule, and resource measurements to assess project performance and progress. • It integrates the scope baseline with the cost baseline, along with the schedule baseline, to form the performance baseline, which helps the project team assess and measure project performance and progress. • Provides a disciplined means of managing the project

  36. Earned Value Concepts • Planned Value (PV) • Authorized budget assigned to scheduled work • Total PV for the project is also known as budget at completion (BAC) • Earned Value (EV) • Measure of work performed expressed in terms of the budget authorized for that work. It is the budget associated with the authorized work that has been completed. • Actual Cost (AC) • Realized cost incurred for the work performed on an activity during a specific time period. It is the total cost incurred in accomplishing the work that the EV measured. • Schedule Variance (SV) • Measure of schedule performance expressed as the difference between the earned value and the planned value • SV = EV - PV

  37. Earned Value Concepts (Contd…) • Cost Variance (CV) • Amount of budget deficit or surplus at a given point in time, expressed as the difference between EV and AC. • CV = EV – AC • Schedule Performance Index (SPI) • Measure of schedule efficiency expressed as the ratio of earned value to planned value • SPI = EV / PV • Cost Performance Index (CPI) • Measure of cost efficiency of budgeted resources expressed as a ratio of earned value to actual cost • CPI = EV / AC

  38. Earned Value, Planned Value and Actual Cost

  39. Forecasting • Estimate at Completion (EAC) • Budget at Completion (BAC) • Estimate to Complete (ETC) • EAC = AC (BAC – EV) • EAC = BAC / CPI • EAC = AC + [(BAC –EV) / (CPI x SPI)] • To-Complete Performance Index (TCPI) • TCPI = Work Remaining (BAC – EV) / Funds Remaining (BAC-AC) or (EAC-AC)

  40. Performance Reviews • Variance Analysis • Cost: CV = EV – AC • Schedule: SV = EV – PV • Variance at Completion: VAC = BAC – EAC • Trend Analysis • Examines project performance over time to determine if performance is improving or deteriorating. • Earned Value Performance • Compares the performance measurement baseline to actual actual schedule and cost performance.

  41. Page 224 of PMBOK 5th Edition for Earned Value Calculations Summary Table

  42. Example

  43. Example • Planned Value = 18 + 10 + 16 + 6 = $50 • Earned Value = 18 + 8 + 14 + 0 = $40 • Actual Cost = $45 (Data from Acct. System) • Therefore: • Schedule Variance = 40 - 50 = -$10 • Schedule Performance Index = 40 / 50 = 0.8

  44. Question

  45. Question 2

  46. Question 2

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