test

2. Project Management 5 Month
Accelerated Course
PJMG 6250
{Cost Management -1}
by
Muhammad Kamran Khan, P.Eng, PMP
Lecture 08

3. COST MANAGEMENT
• Includes estimating, budgeting, and
controlling costs so that the project is
completed within the budget
• Ability to influence cost is greatest at the
early stages of the project
• Stakeholder requirements for capturing costs
must be considered
• Primarily concerned with the cost of the
resources needed to complete the project
• Must also consider recurring costs

4. PLAN COST MANAGEMENT
(PLANNING PROCESS GROUP)

5. INPUTS AND OUTPUTS
• INPUTS:
– Project Management Plan
– Project Charter
– Enterprise Environmental factors
– Organizational Process Assets
• OUTPUTS:
– Cost Management Plan

6. TOOLS AND TECHNIQUES
• Expert Judgment
• Analytical Techniques
• Meetings

7. COST MANAGEMENT PLAN
• Created as part of the Develop Project
Management Plan process in Integration
Management
• Sets out the format
• Establishes the criteria for planning, structuring,
estimating, budgeting, and controlling project
costs
• Based upon the needs, Plan can be formal or
informal, highly detailed, or broadly framed

8. COST MANAGEMENT PLAN (contd)
• Cost Management Plan can establish the
following:
– Level of accuracy
– Life cycle costing
– Units of measure
– Organizational procedures links
– Control thresholds
– Rules of performance measurement
– Reporting formats
– Process descriptions

9. LEVEL OF ACCURACY
• Based on the scope, magnitude, and
sensitivity of the project, the data can be
rounded to a prescribed precision e.g. $ 5.0
million; $ 100
• Contingencies’ costs can be included

10. LIFE CYCLE COSTING
• Looking at the cost of the whole life of the
product, not just the cost of the project
• Costs include construction, operation,
maintenance, and disposal of the asset
• We can plan a low quality project and can
save some initial capital costs but repair and
maintenance costs may be high thus making
the total life cycle cost to be very high

11. UNITS OF MEASURE
• What are the units used for measurement
• Nowadays, binder course in pavements is
measured in tons and surface course in
square meters
• Other examples are staff hours, staff days,
weeks, or lump sum etc.

12. ORGANIZATIONAL PROCEDURES LINKS
(Control Account)
• Work Breakdown Structure (WBS) provides
framework for Cost Management Plan
• The component of WBS which is used for the
project cost accounting is called the Control
Account (CA)
• Control accounts are given a unique code or
account number(s)
• Links directly to the Accounting System

13. ORGANIZATIONAL PROCEDURES LINKS
(Control Account) contd
• Normally, cost estimates are calculated
through activities
• On large projects, it is practical to estimate
and control costs at a different level
• Control Account is at a higher level than the
work package in the WBS

14. CONTROL THRESHOLDS
• Thinking ahead how costs will be controlled
• Control Thresholds are the amount of
variation allowed before taking action
• Determined in planning while creating the
Cost Management Plan
• Thresholds are normally expressed as
percentage deviations from the baseline plan

15. RULES OF PERFORMANCE MEASUREMENT
• Earned Value Management (EVM) rules for
the measurement of performance are
explained in the Cost Management Plan e.g.
–Control Accounts
–Fixed Formulae; Weighted Milestones; %
complete
–Earned Value Management computation
equations

16. REPORTING FORMATS
• Formats of the Cost Reports
• Frequency of the cost reports

17. PROCESS DESCRIPTIONS
• Descriptions of each of the three cost
management processes are documented
which are:
–Estimate Costs
–Determine Budget
–Control Costs

18. ESTIMATE COSTS
(PLANNING PROCESS GROUP)

19. ESTIMATE COSTS
• Process of developing a cost estimate needed
to complete project activities
• Cost estimates are predictions based on
knowledge
• Cost trade-offs and risks must be considered:
–Make or Buy
–Buy or Lease
–Optimal Costs

20. ESTIMATE COSTS (contd)
• Cost estimate is a quantitative assessment
• Cost estimating is an iterative process and
estimates vary from phase to phase
• The estimate’s accuracy increases, as the
project progresses
• Cost estimate may include labour, materials,
equipment, services, facilities, inflation, or
contingency costs

21. TYPES OF COSTS
• Variable:
– Material, Supplies, Wages etc.
• Fixed:
– Set-up, Rental etc.
• Direct:
– Team Travel, Wages, Recognition, Material etc.
• Indirect:
– Taxes, Fringe Benefits, Janitorial Services etc.

22. INPUTS
• Cost Management Plan
• Scope Baseline
• Project Schedule
• Human Resource Management Plan
• Risk Register
• Enterprise Environmental Factors
• Organizational Process Assets
• Project Management Costs

23. SCOPE BASELINE
• It includes:
– Scope Statement
– Work Breakdown Structure (WBS)
– WBS Dictionary
• Additionally, it may include:
—Contract / Legal requirements related to
Health, safety, security, performance,
environmental, insurance, intellectual
property rights, licenses, and permits

24. PROJECT SCHEDULE
• Key input to the cost management
• Activity duration estimates can also affect
cost estimates
• A schedule is needed before someone can
come up with a budget
• Cost also affect schedule e.g. seasonal
pricing, new model releases

25. HUMAN RESOURCE MANAGEMENT
PLAN
• Components of costs can be:
– Project Staffing Attributes (Quantity and
Skills)
– Personnel Rates
– Labour Rates
– Rewards
– Recognition
• The above-mentioned are cost items and must
be calculated

26. RISK REGISTER
• Risk is both an input as well as output
• Identify whether risks are threats or
opportunities
• Risks have impact on both activity and overall
project costs
• There is a cost associated with the efforts to
control risk
• With a negative risk, the near term cost
increases

27. ENTERPRISE ENVIRONMENTAL
FACTORS
• Market conditions
– Products, Services, Results
– Supply and Demand
• Published commercial information
– Sellers’ lists of Costs / Rates / Prices
– Human Resource Costs
– Costs of Materials and Equipment

28. ORGANIZATIONAL PROCESS ASSETS
• Policies for Cost Estimating
• Processes / Procedures
• Templates for Cost Estimating
• Historical Information
• Lessons learned

29. PROJECT MANAGEMENT COSTS
• Project Management saves money overall but
Project Management activities cost money
• Project Management costs must be included in
the Cost Estimates
• Project Management activities include:
– Efforts of the Project Management Team
– Reports (Status / Progress)
– Analysis

30. TOOLS AND TECHNIQUES
• Expert Judgment
• Analogous Estimating
• Parametric Estimating
• Bottom-up Estimating
• Three-Point Estimates
• Reserve Analysis
• Cost of Quality
• Project Management Estimating Software
• Vendor Bid Analysis
• Group Decision-Making Techniques

31. EXPERT JUDGMENT
• Labour rates, material costs, inflation, risk
factors etc. affect cost estimates
• Expert judgment can provide useful insight
from other experiences
• Expert judgment can sift through different
estimating philosophies and can adopt the
best strategy

32. ANALOGOUS ESTIMATING
• Top down
• Gross Value Estimating Approach
• Expert Judgment or Historical Information
• Less costly and time consuming but less accurate

33. PARAMETRIC ESTIMATING
• Calculates projected costs for an activity based
on historical records
• Parametric Estimating Guides can be used
• Cost per linear meter; cost per installation;
labour costs per unit of work
• Regression Analysis (Scatter Diagram)
• Learning Curve
• Can produce higher levels of accuracy depending
upon the quality of data available

34. BOTTOM-UP ESTIMATING
• Method of estimating a component of work
• The cost of each work package activity is
calculated in detail
• The costs are then rolled up into control
accounts and then to total estimate
• The size and complexity of the activity or
work package plays a key role

35. THREE-POINT ESTIMATES
• PERT (Program Evaluation and Review
Technique)
• CE = Expected Cost
• CP = Pessimistically estimated Cost
• CO = Optimistically estimated Cost
• CM = Most Likely Estimated Cost
• CE = (CO + 4CM + CP) /6

36. RESERVE ANALYSIS
• Cost estimates may include reserves
• Contingency Reserves
– reserves or buffers
– These are for risks remained after the Plan
Risk Responses Process
– Known unknowns
• Management Reserve (lump sum)
— These are for unforeseen risks
— Unknown Unknowns

37. COST OF QUALITY (COQ)
• Make sure the project is not spending too
much to assure quality
• Cost of Quality involves looking at what the
Costs of Conformance and Non-conformance
to the Quality will be on the project and
creating an appropriate balance
• Cost of Conformance should be lower than
the Costs of Non-conformance

38. COST OF QUALITY (COQ)

39. PROJECT MANAGEMENT ESTIMATING
SOFTWARE
• Softwares can speed up the calculations
• Greater level of accuracy
• Some of the techniques used are as:
–Cost estimating software applications
–Spreadsheets
–Simulations
–Statistical tools

40. VENDOR BID ANALYSIS
• Analysis of costs based on bids from vendors
• In a competitive environment, individual
deliverables are also analyzed to rationalize
the costs
• In alternate delivery models, the overall cost
vis-à-vis the proposal is analyzed

41. OUTPUTS
• Activity Cost Estimates
–Quantitative Assessment of Costs
• Basis of Estimates
–Supporting documentation how the costs
were calculated
• Project Document Updates
–Risk Register etc.

42. ACCURACY OF ESTIMATES
• Rough Order of Magnitude (ROM):
– Done in the Initiating Process
– Range = +/- 50%
• Budget Estimate:
– Done in the Planning Process
– Range = -10% to +25% from actual
• Definitive Estimate:
– Done in the later stage of the project
– Range = -5% to +10% from actual
– Range = +/- 10% from actual

43. REFERENCES
 Project Management Institute, A Guide to the Project
Management Body of Knowledge, (PMBOK® Guide) –
Fifth Edition, Project Management Institute, Inc., 2013.
 Project Management: A Managerial Process by Gray &
Larson, 5th edition.
 Managing Project Quality by Kloppenborg & Petrick, 2002
edition.
 Human
Human
Resource Skills for the Project Manager, The
Aspects of Project Management by
Vijay K.Verma, Vol 2, 1996 edition.
 Principles of Project Management by John R. Adams