This document provides an overview of project cost management. It discusses estimating costs, determining budgets, and controlling costs. Key aspects include estimating methods like analogous, bottom-up, and parametric; determining a cost baseline; using earned value formulas like CPI, SPI, ETC, and EAC to track performance; and controlling costs through variance analysis and forecasting. The goal is planning, estimating, budgeting, and controlling costs to complete projects within approved budgets.
2. Project Cost ManagementProject Cost Management
““The processes involved in planning,The processes involved in planning,
estimating, budgeting, and controllingestimating, budgeting, and controlling
costs so that the budget can be completedcosts so that the budget can be completed
within the approved budget”within the approved budget”
3. Why Do We Manage Cost?Why Do We Manage Cost?
Part of triple constraint, can’t manage one withoutPart of triple constraint, can’t manage one without
the others (scope, time, and quality)the others (scope, time, and quality)
Plots of cost and scope against plan can help spotPlots of cost and scope against plan can help spot
problems earlyproblems early
Cumulative
Value
Time
Planned
Value (PV)
Actual
Costs (AC)
Earned
Value (EV)
Today
Is this project
over/under budget?
Is it ahead of/behind
schedule?
4. Cost Management Key TermsCost Management Key Terms
PV - Planned Value,PV - Planned Value, estimatedestimated value of the planned workvalue of the planned work
EV – Earned Value,EV – Earned Value, estimatedestimated value of work donevalue of work done
AC – Actual Cost, what you paidAC – Actual Cost, what you paid
BAC – Budget at Completion, the budget for the total jobBAC – Budget at Completion, the budget for the total job
EAC –Estimate at Completion, what is the total jobEAC –Estimate at Completion, what is the total job
expected to cost?expected to cost?
ETC – Estimate to Complete, forecasted costs to completeETC – Estimate to Complete, forecasted costs to complete
jobjob
VAC – Variance at Completion, how much over/underVAC – Variance at Completion, how much over/under
budget do we expect to be?budget do we expect to be?
5. How Do We Manage Cost?How Do We Manage Cost?
Three processesThree processes
Estimate CostsEstimate Costs
Determine BudgetDetermine Budget
Control CostsControl Costs
Estimate
Costs
Determine
Budget
Control
Costs
7. Estimating MethodsEstimating Methods
Analogous (Top Down) estimatingAnalogous (Top Down) estimating – Managers– Managers
use expert judgment or similar project costsuse expert judgment or similar project costs
[quick, less accurate][quick, less accurate]
Bottom-Up estimatingBottom-Up estimating – People doing work– People doing work
estimate based on WBS, rolled up into projectestimate based on WBS, rolled up into project
estimate [slow, most accurate]estimate [slow, most accurate]
Parametric estimatingParametric estimating – Use mathematical model– Use mathematical model
(i.e. cost per sq ft). [accuracy varies](i.e. cost per sq ft). [accuracy varies] Two types:Two types:
Regression analysis – based on analysis of multipleRegression analysis – based on analysis of multiple
data pointsdata points
Learning Curve – The first unit costs more than theLearning Curve – The first unit costs more than the
100100thth
, forecasts efficiency gains, forecasts efficiency gains
8. Estimating MethodsEstimating Methods
Vendor Bid AnalysisVendor Bid Analysis – Estimating using bids +– Estimating using bids +
allowances for gaps in bid scope [slow, accuracyallowances for gaps in bid scope [slow, accuracy
depends on gaps]depends on gaps]
Reserve AnalysisReserve Analysis – Adding contingency to each– Adding contingency to each
activity cost estimates as zero duration item [slow,activity cost estimates as zero duration item [slow,
overstates cost]overstates cost]
10. Determine BudgetDetermine Budget
Budgeting is allocating costs to work packagesBudgeting is allocating costs to work packages
to establish a cost baseline to measure projectto establish a cost baseline to measure project
performanceperformance
Remember Contingency items are for unplannedRemember Contingency items are for unplanned
but required changes it is not to cover thingsbut required changes it is not to cover things
such as:such as:
Price escalationPrice escalation
Scope & Quality ChangesScope & Quality Changes
Funding Limit Reconciliation – Smoothing outFunding Limit Reconciliation – Smoothing out
the project spend to meet managementthe project spend to meet management
expectationsexpectations
11. Control CostsControl Costs
Cost Baseline
Project Funding
Requirements
Performance
Reports
Cost change control system
Performance measurement
analysis
Forecasting
Project performance reviews
Project management
software
Variance management
Inputs
OutputsTools & Techniques
Work Performance
Information
Approved Change
Requests
Project
Management Plan
Cost Estimate
Updates
Cost Baseline
Updates
Performance
Measurements
Forecasted
Completion
Requested Changes
Recommended
Corrective Actions
Organizational
Process Assets
Updates
Project Management
Plan Updates
Estimate
Costs
Determine
Budget
Control
Costs
12. Earned ValueEarned Value
Progress is compared against theProgress is compared against the
baseline to determine whetherbaseline to determine whether
project is ahead of or behind planproject is ahead of or behind plan
Percent complete can be difficultPercent complete can be difficult
to measure, some managers useto measure, some managers use
rulesrules
50/50 Rule – Assumed 50%50/50 Rule – Assumed 50%
complete when task started, finalcomplete when task started, final
50% at completion50% at completion
20/80 Rule – 20% at start20/80 Rule – 20% at start
0/100 Rule – No credit until complete0/100 Rule – No credit until complete
Planned ValuePlanned Value
(PV) – Budgeted(PV) – Budgeted
CostCost
Earned ValueEarned Value
(EV) – Actual(EV) – Actual
work completedwork completed
Actual Cost (AC)Actual Cost (AC)
– Costs incurred– Costs incurred
Estimate toEstimate to
Complete (ETC)Complete (ETC)
– What’s Left– What’s Left
Estimate atEstimate at
Completion (EAC)Completion (EAC)
– What final cost– What final cost
will bewill be
14. Earned Value FormulasEarned Value Formulas
NAMENAME FORMULAFORMULA NOTESNOTES
Cost Variance (CV)Cost Variance (CV) EV-ACEV-AC Negative = Over budgetNegative = Over budget
Positive = Under budgetPositive = Under budget
Schedule VarianceSchedule Variance
(SV)(SV)
EV-PVEV-PV Negative = Behind ScheduleNegative = Behind Schedule
Positive = Ahead of SchedulePositive = Ahead of Schedule
Cost PerformanceCost Performance
Index (CPI)Index (CPI)
EV/ACEV/AC How much are we getting for everyHow much are we getting for every
dollar we spend?dollar we spend?
Schedule PerformSchedule Perform
Index (SPI)Index (SPI)
EV/PVEV/PV Progress as % against planProgress as % against plan
Estimate to CompleteEstimate to Complete
(ETC)(ETC)
EAC-ACEAC-AC How much more do we have toHow much more do we have to
spend?spend?
Variance atVariance at
Completion (VAC)Completion (VAC)
BAC-EACBAC-EAC At the end of the day, how close willAt the end of the day, how close will
we be to plan?we be to plan?
Estimate atEstimate at
Completion (EAC)Completion (EAC)
See following slideSee following slide
15. Earned Value Formulas (Cont’d)Earned Value Formulas (Cont’d)
NAMENAME FORMULAFORMULA NOTESNOTES
Estimate atEstimate at
Completion (EAC)Completion (EAC)
BAC/CPIBAC/CPI Use if no variancesUse if no variances fromfrom
BAC have occurredBAC have occurred
AC+ATCAC+ATC Use when originalUse when original
estimate was bad. Actualsestimate was bad. Actuals
+ New estimate+ New estimate
AC+BAC-EVAC+BAC-EV Use when currentUse when current
variances are not expectedvariances are not expected
to be there in the futureto be there in the future
AC+(BAC-EV)/CPIAC+(BAC-EV)/CPI Use when currentUse when current
variances are expected tovariances are expected to
continuecontinue
16. Tricks for Earned ValueTricks for Earned Value
EV is always firstEV is always first
Variance = EV minus somethingVariance = EV minus something
Index = EV divided by somethingIndex = EV divided by something
If the formula relates to cost use ACIf the formula relates to cost use AC
If the formula relates to schedule use PVIf the formula relates to schedule use PV
Interpreting results: negative is bad and positive is goodInterpreting results: negative is bad and positive is good
Interpreting results: greater than one is good, less thanInterpreting results: greater than one is good, less than
one is badone is bad
PV
AC ETC
EAC
BAC
Project
Start
Current
Status
17. Terms to RememberTerms to Remember
Present ValuePresent Value
Net Present Value (NPV)Net Present Value (NPV)
Internal Rate of ReturnInternal Rate of Return
(IRR)(IRR)
Payback PeriodPayback Period
Benefit Cost Ratio =Benefit Cost Ratio =
BCR>1, Payback is greaterBCR>1, Payback is greater
than the costthan the cost
Opportunity CostOpportunity Cost
Sunk CostSunk Cost
Working CapitalWorking Capital
Straight Line DepreciationStraight Line Depreciation
Accelerated DepreciationAccelerated Depreciation
Double Declining BalanceDouble Declining Balance
Sum of Years DigitsSum of Years Digits
Value Analysis (ValueValue Analysis (Value
Engineering)Engineering)
You won’t be calculating most of these numbers on the test,
just remember the concepts for general questions
