3. Process Groups & Knowledge Areas Mapping
Knowledge
Areas
Process Groups
Initiating Planning Executing Monitoring & Controlling Closing
Integration
Develop Project
Charter
Develop Project Management Plan
Direct and Manage Project Work
Manage Project Knowledge
Monitor and Control Project Work
Perform Integrated Change Control
Close Project or Phase
Scope
Plan Scope Management
Collect Requirements
Define Scope
Create WBS
Validate Scope
Control Scope
Schedule
Plan Schedule Management
Define Activities
Sequence Activities
Estimate Activity Durations
Develop Schedule
Control Schedule
Cost
Plan Cost Management
Estimate Costs
Determine Budget
Control Costs
Quality Plan Quality Management Manage Quality Control Quality
Resource
Plan Resource Management
Estimate Activity Resources
Acquire Resources
Develop Team
Manage Team
Control Resources
Communications Plan Communications Management Manage Communications Monitor Communications
Risk
Plan Risk Management
Identify Risks
Perform Qualitative Risk Analysis
Perform Quantitative Risk Analysis
Plan Risk Responses
Implement Risk Responses Monitor Risks
Procurement Plan Procurement Management Conduct Procurements Control Procurements
Stakeholder Identify Stakeholders Plan Stakeholder Engagement Manage Stakeholder Engagement Monitor Stakeholder Engagement
3
4. Project Cost Management
Knowledge
Area
Process Groups
Initiating Planning Executing
Monitoring &
Controlling
Closing
Cost
• Plan Cost
Management
• Estimate Costs
• Determine Budget
• Control Costs
Enter phase/
Start project
Exit phase/
End project
Initiating
Processes
Closing
Processes
Planning
Processes
Executing
Processes
Monitoring &
Controlling Processes
4
5. Project Cost Management
• The process involved in planning, estimating, budgeting, financing, funding,
managing and controlling cost so that the project can be completed within
approved budget.
• Life cycle costing:
– Looking at the cost of whole life of the product (include maintenance).
• Value analysis (value engineering):
– Looking at less costly way to do the same work within the same scope.
• Law of Diminishing Returns:
– E.g. adding twice resource to task may not get the task done in half cost /
time.
• Time value of money (depreciation);
• Cost will also affect the schedule;
• Cost risk vs. Type of contract.
5
6. 1 - Plan Cost Management
• Process of establishing the policies, procedures, and documentation for
planning, managing, expending, and controlling project costs:
– Cost trade-offs & risk must be considered;
– Cost estimates should be refined.
Inputs
1. Project management
plan
2. Project charter
3. Enterprise
environmental factors
4. Organizational
process assets
Tools & Techniques
1. Expert judgment
2. Analytical techniques
3. Meetings
Outputs
1. Cost management
plan
6
8. Cost Management Plan (Outputs)
• Units of measure;
• Level of precision;
• Level of accuracy;
• Organizational procedures links;
• Control thresholds;
• Rules of performance measurement (EVM);
• 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.
8
9. 2 - Estimate Costs
• Process of developing an approximation of the monetary resources needed to
complete project activities.
Inputs
1. Cost management
plan
2. Human resource
management plan
3. Scope baseline
4. Project schedule
5. Risk register
6. Enterprise
environmental factors
7. Organizational
process assets
Tools & Techniques
1. Expert judgment
2. Analogous estimating
3. Parametric estimating
4. Bottom-up estimating
5. Three-point estimates
6. Reserve analysis
7. Cost of quality
8. Project management
software
9. Vendor bid analysis
10.Group decision-making
techniques
Outputs
1. Activity cost
estimates
2. Basis of estimates
3. Project documents
updates
9
11. Types of Cost
• Variable Costs:
– Change with the amount of production / work;
– E.g. material, supplies, wages.
• Fixed Costs:
– Do not change as production change;
– E.g. set-up, rental.
• Direct Costs:
– Directly attributable to the work of project;
– E.g. team travel, recognition, team wages.
• Indirect Costs:
– Overhead or cost incurred for benefit of more than one project;
– E.g. taxes, fringe benefit, janitorial services.
11
12. • Most difficult to estimate as very little project info is
available, made during initiating process.
Estimate Accuracy
Rough Order of
Magnitude
(ROM)
+/- 50%
Budget
Estimate
- 10%
+ 25%
Definitive
Estimate
- 5%
+ 10%
• Used to finalize the Request for Authorization (RFA), and
establish commitment, made during planning phase.
• During the project and refined.
Quality / Accuracy of Cost Estimation
12
13. 3 - Determine Budget
• Process of aggregating the estimated cost of individual activities or work
packages to establish an authorized cost baseline.
Inputs
1. Cost management plan
2. Scope baseline
3. Activity cost estimates
4. Basis of estimates
5. Project schedule
6. Resource calendars
7. Risk register
8. Agreements
9. Organizational process
assets
Tools & Techniques
1. Cost aggregation
2. Reserve analysis
3. Expert judgment
4. Historical relationship
5. Funding limit
reconciliation
Outputs
1. Cost performance
baseline
2. Project funding
requirements
3. Project documents
updates
13
15. Cost Aggregation
• Reserves & risk management are important while
estimating:
– Contingency reserves: The cost impacts of the
remaining risk;
Cost baseline
– Management reserves: Extra fund to cover
unforeseen risk or changes to the project;
Cost budget
Activity estimates
Work package estimates
Control account estimates
Project estimates
Contingency reserves
Management reserves
Cost baseline
Cost budget
15
16. Determines Budget: Other Considerations
• High level parametric estimate as a rule of thumb:
– E.g. testing cost 50% of development cost;
• Funding limit reconciliation = checking cash flow:
– When the money will be available?
• Reconciliation needed before proposed cost baseline and cost budget become
final:
– Such reconciliation is part of integration management.
16
17. 4 - Control Costs
• Process of monitoring the status of the project to update the project cost and
managing changes to the cost baseline.
Inputs
1. Project management
plan
2. Project funding
requirements
3. Work performance
data
4. Organizational
process assets
Tools & Techniques
1. Earned value
management
2. Forecasting
3. To-complete
performance index
4. Performance reviews
5. Project management
software
6. Reserve analysis
Outputs
1. Work performance
information
2. Cost forecast
3. Change requests
4. Project management
plan updates
5. Project documents
updates
6. Organizational
process updates
17
19. How to Control Cost?
• Follow the cost management plan;
• Look at any organizational process asset that are available;
• Manage change:
– Recording all appropriate change;
– Preventing incorrect change;
– Ensuring requested changes are agreed upon;
– Managing the actual changes when and as they occur.
• Measure and measure and measure (monitoring).
19
20. Progress Report
• Progress / performance report (output from communication area):
– Where work cannot be measured, estimate could be done by a guess;
• Percent complete:
– 50 / 50 Rule;
– 20 / 80 Rule;
– 0 / 100 Rule;
– Activity is considered X percent complete when it begins and get credit for
the last Y percent only when it is complete.
20
21. Earned Value Management (Tools & Techniques)
• Method to measure project performance and progress against scope,
schedule and cost baseline (performance measurement baseline).
• Interpretation of basic EVM performance measures:
– Cost Performance Index (CPI);
– Schedule Performance Index (SPI).
21
22. Earned Value Management (cont.)
EV can be calculated by
(% progress) x (planned man-days)
22
23. Earned Value Technique
Terms and Formulas Definition Example
Earned Value (EV)
As of today, what is the estimated value of the
work actually accomplished?
$100K
Actual Cost (AC)
As of today, what is the actual cost incurred for
the work accomplished?
$200K
Planned Value (PV)
As of today, what is the estimated value of work
planned to be done?
$300K
Cost Variance (CV)
= EV - AC
Negative is over budget.
Positive is under budget.
$100K - $200K
= ($100K)
Schedule Variance (SV)
= EV - PV
Negative is behind schedule.
Positive is ahead schedule.
$100K - $300K
= ($200K)
Cost Performance Index
(CPI) = EV / AC
We are getting $__ worth of work out of every $1
spent. Are funds being used efficiently?
$100K / $200K
= 0.5 i.e. 50%
Schedule Performance
Index (SPI) = EV / PV
We are (only) progressing at __ percent of the
rate originally planed.
$100K / $300K
= 0.33 i.e. 33%
Revised Total Duration Baseline Duration / Schedule Performance Index
4 / 0.33
= 12 months
Example:
Project Budget: $400K
Project Schedule: 4 months
At the 3 month checkpoint:
Spent: $200K
Work completed: $100K
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24. Earned Value Technique (cont.)
Terms and Formulas Definition
Budget at completion (BAC) How much did we BUDGET for the TOTAL project effort?
Estimate at Completion (EAC)
= BAC / CPI
What do we currently expect the TOTAL project cost (a
forecast)?
Estimate to Complete (ETC)
= EAC - AC
From this point on, how much MORE do we expect it to cost to
finish the project (a forecast)?
Variance at Completion (VAC)
= BAC - EAC
As of today, how much over or under budget do we expect to
be at the end of the project?
• EAC is an important forecasting value.
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25. Earned Value: Graphical Representation
TIME
COST
Schedule
Variance
(SV)
Cost
Variance
(CV)
ACTUAL
PLAN
EARN VALUE
Estimate at
Completion
(EAC)
Budget at
Completion
(BAC)
Projection of
schedule delay
at completion
Projection of cost
variance at
completion (VAC)
TODAY
(Reporting day)
BAC
EAC
AC
EV
PV
• Project is over budget & behind schedule:
25
26. Exercise
Task Progress Cost spent
Side 1 |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||100% $1,200
Side 2 |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||100% $1,000
Side 3 |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||75% $750
Side 4 |||||||||||||||||||||||||||||||||||||||50% $500
Side 5 |0% $0
Side 6 |0% $0
• You have a project to build a box. The box is six sided. Each side is to take
one day to build and is budgeted for $1000 per side. The sides are planned to
be completed one after the other. Today is the end of day three.
• Using the following project status chart, calculate PV, EV, AC, BAC, CV, CPI,
SV, SPI, EAC, ETC, VAC.
• Describe your interpretation based on the calculation.
26
27. Exercise Solution
Parameter Calculation Result
PV
EV
AC
BAC
CV
CPI
SV
SPI
EAC
ETC
VAC
• Project is below / over budget?
• Project is late / ahead schedule?
• How much more money we need?
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28. Exercise Solution
Parameter Calculation Result
PV 1000 + 1000 + 1000 3000
EV (100% x 1000) + (100% x 1000) + (75% x 1000) + (50% x 1000) 3250
AC 1200 + 1000 + 750 + 500 3450
BAC 6 x 1000 6000
CV 3250 - 3450 -200
CPI 3250 / 3450 0.94
SV 3250 - 3000 250
SPI 3250 / 3000 1.08
EAC 6000 / 0.94 6383
ETC 6383 - 3450 2933
VAC 6000 - 6383 -383
• Over budget, getting 0.94 dollar for every dollar we spent;
• Ahead schedule, progressing 108% of the rate planned;
• Probably will spend $6383 at the end (estimation), need $2933 to complete,
over budget at the end for about $383 (estimation)
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29. Forecasting EAC
• There are many ways to calculate EAC, depending on the assumption made.
• Simple EAC calculation (EAC = BAC / CPI) assume that the cumulative CPI
adequately reflects past performance that will continue to the end of the project.
• EAC = AC + BAC - EV:
– Used when current variances are thought to be atypical of the future.
• EAC = AC + [(BAC - EV) / (Cumulative CPI x Cumulative SPI)]:
– It assumes poor cost performance and need to hit a firm completion date.
29
30. Forecasting EAC (cont.)
• Common alternative ways to calculate EAC:
Assumption Example Formula
Future cost performance will be the same as all
past cost performance
EAC = AC + [(BAC - EV) / CPI] = BAC / CPI
Future cost performance will be the same as the
last three measurement periods (i, j, k)
EAC = AC + [(BAC - EV) / ((EVi + EVj + EVk) / (ACi
+ ACj + ACk))]
Future cost performance will be influenced
additionally by past schedule performance
EAC = AC + [(BAC - EV) / (CPI x SPI)]
Future cost performance will be influenced jointly
in some proportion by both indices
EAC = AC + [(BAC - EV) / (0.8 CPI + 0.2 SPI)]
30
31. To-Complete Performance Index (TCPI)
• Helps the team determine the efficiency that must be achieved on the
remaining work for a project to meet a specified endpoint, such as BAC or the
team’s revised EAC.
• TCPI
AC)
-
(EAC
or
AC)
-
(BAC
Remaining
Funds
EV)
-
(BAC
Remaining
Work
31
32. Earned Schedule - An emerging EVM practice
• SPI ($):
– At project start SPI is reliable;
– At some point SPI accuracy diminishes;
– Toward the project end it is useless (SPI = 1 at project end);
– Does not show weeks / months of schedule variance.
• SPI (t):
– Time based schedule measures;
– Create a SPI that is accurate to the of the project:
• SV (t) = ES - AT;
• SPI (t) = ES / AT.
• ES = Earned Schedule (Planned time);
• AT = Actual time.
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33. EVM - Hints to remember
• EV comes first in every formula;
• If it’s variance, the formula is EV - something;
• If it’s index, the formula is EV / something;
• If it relates to cost, use AC;
• If it relates to schedule, use PV;
• Negative number is bad, positive is good;
• If it’s index, smaller than 1 is bad, bigger than 1 is good.
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