See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/283210199

Project Cost Management

Conference Paper · October 2015

CITATION READS

1 24,888

1 author:

Eda Buchner
Yeditepe University
21 PUBLICATIONS   6 CITATIONS   

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

Geoploitics, geopolitics of energy, critical infrastructure, energy security. View project

All content following this page was uploaded by Eda Buchner on 28 March 2016.

The user has requested enhancement of the downloaded file.

Project Cost
Management
Eda Buchner
 Project Cost Management
“The processes involved in planning, estimating, budgeting,
and controlling costs so that the budget can be completed
within the approved budget”
 Cost Management
Part of triple constraint, can’t manage one without
the others (scope, time, and quality)
Plots of cost and scope against plan can help spot
problems early

Today
Actual
Costs (AC) Planned
Value (PV)
Cumulative
Value
Is this project
Earned over/under budget?
Value (EV)
Is it ahead of/behind
schedule?
Time
Cost Management Key Terms
PV - Planned Value, estimated value of the planned work
EV – Earned Value, estimated value of work done
AC – Actual Cost, what you paid
BAC – Budget at Completion, the budget for the total job
EAC –Estimate at Completion, what is the total job
expected to cost?
ETC – Estimate to Complete, forecasted costs to complete
job
VAC – Variance at Completion, how much over/under
budget do we expect to be?
 Cost Management Process?
Three processes
 Estimate Costs
 Determine Budget
 Control Costs

Estimate Determine Control

Budget
Costs Costs
 Types of Cost Estimates
Type of Estimate When Done Why Done How Accurate
Rough Order of Very early in the Provides rough –25%, +75%
Magnitude (ROM) project life cycle, ballpark of cost for
often 3–5 years selection decisions
before project
completion
Budgetary Early, 1–2 years out Puts dollars in the –10%, +25%
budget plans
Definitive Later in the project, < Provides details for –5%, +10%
1 year out purchases, estimate
actual costs
 Estimate Costs
Enterprise Inputs Tools & Techniques Outputs
Environmental
Factors  Analogous estimating

Organizational  Determine resource cost

Process Assets rates Activity Cost
Estimates
 Bottom up estimating
Project Scope
Statement  Parametric estimating Activity Cost
Estimates
Work Breakdown  Project management Supporting Detail
Structure software
 Vendor bid analysis Requested Changes
WBS Dictionary
 Reserve analysis
Project  Cost of quality Cost Management
Management Plan Plan Updates
•Schedule Mgmt Pln
•Staffing Mgmt Pln
•Risk Register

Estimate Determine Control

Budget
Costs Costs
 Estimating Methods
Analogous (Top Down) estimating – Managers
use expert judgment or similar project costs
[quick, less accurate]
Bottom-Up estimating – People doing work
estimate based on work base suggestion, rolled
up into project estimate [slow, most accurate]
Parametric estimating – Use mathematical model
[accuracy varies] Two types:
Regression analysis – based on analysis of multiple
data points
Learning Curve – The first unit costs more than the
100th, forecasts efficiency gains
 Estimating Methods
Vendor Bid Analysis – Estimating using bids +
allowances for gaps in bid scope [slow, accuracy
depends on gaps]
Reserve Analysis – Adding contingency to each
activity cost estimates as zero duration item [slow,
overstates cost]
 Determine Budget
Tools & Techniques
Outputs
Project Scope Statement  Cost aggregation Cost Baseline
Work Breakdown Structure  Reserve analysis
 Parametric estimating
WBS Dictionary Project Funding
Inputs  Funding limit reconciliation Requirements
Activity Cost Estimates
Activity Cost Estimates Cost Management
Supporting Detail Plan Updates
Project Schedule
Requested Changes
Resource Calendars
Contract
Cost Management Plan

Estimate Determine Control

Budget
Costs Costs
Example: Project Cost Estimate Overview
Category Description
Objective Install a suite of packaged financial applications
software which will enable more timely
information for management decision-making,
easier access to data by the ultimate end user, and
allow for cost savings through productivity
improvements throughout the company.
Scope The core financial systems will be replaced by
Oracle financial applications. These systems
include:
 General Ledger
 Fixed Assets
 Ops Report [AU: spell out Ops]
 Accounts Payable
 Accounts Receivable
 Project Accounting
 Project Management
Assumptions Oracle's software provides

Cost/Benefit Analysis
& Internal Rate of Return (IRR)
 Minimal customization
 No change in procurement systems during
accounts payable implementation
BSR was broken down into a three-year cash
outlay without depreciation. Costs are
represented in thousands. Capital and expenses
are combined in this example.
 Example: Business Systems Replacement
Project Cash Flow Analysis
FY95 FY96 FY97 3 Year Future Annual
Total Costs/Savings
($000) ($000) ($000) ($000) ($000)
Costs
Oracle/PM Software 992 500 0 1492 0
(List Price)
60% Discount (595) (595)
Oracle Credits (397) 0 (397)
Net Cash for Software 0 500 500
Software Maintenance 0 90 250 340 250
Hardware & Maintenance 0 270 270 540 270
Consulting &Training 205 320 0 525 0
Tax & Acquisition 0 150 80 230 50
Total Purchased Costs 205 1330 600 2135 570
Information Services & 500 1850 1200 3550 0
Technology (IS&T)
Finance/Other Staff 200 990 580 1770
Total Costs 905 4170 2380 7455 570

Savings
Mainframe (101) (483) (584) (597)
Finance/Asset/PM (160) (1160) (1320) (2320)
IS&T Support/Data Entry (88) (384) (472) (800)
Interest 0 (25) (25) (103)
Total Savings (349) (2052) (2401) (3820)

Net Cost (Savings) 905 3821 328 5054 (3250)

8 Year Internal 35%

Rate of Return
 Determine Budget
Budgeting is allocating costs to work packages
to establish a cost baseline to measure project
performance
Remember Contingency items are for unplanned
but required changes it is not to cover things
such as:
 Price escalation
 Scope & Quality Changes
Funding Limit Reconciliation – Smoothing out
the project spend to meet management
expectations
 Control Costs
Inputs Tools & Techniques Outputs Cost Estimate
Cost Baseline  Cost change control system Updates

Project Funding  Performance measurement Cost Baseline

Requirements analysis Updates
Performance
 Forecasting
Performance Measurements
Reports  Project performance reviews
Forecasted
Work Performance  Project management Completion
Information software
Requested Changes
 Variance management
Approved Change Recommended
Requests Corrective Actions
Organizational
Project
Process Assets
Management Plan
Updates
Project Management
Plan Updates

Estimate Determine Control

Budget
Costs Costs
Example: Budget Estimates and Explanations
Budget Category Estimated Costs Explanation
Headcount (FTE) 13 Included are 9 programmer/analysts, 2
database analysts, 2 infrastructure
technicians.
Compensation $1,008,500 Calculated by employee change notices
(ECNs) and assumed a 4% pay increase in
June. Overload support was planned at
$10,000.
Consultant/Purchased $424,500 Expected consulting needs in support of the
Services Project Accounting and Cascade
implementation efforts; maintenance
expenses associated with the Hewlett-
Packard (HP) computing platforms;
maintenance expenses associated with the
software purchased in support of the BSR
project.
Travel $25,000 Incidental travel expenses incurred in
support of the BSR project, most associated
with attendance of user conferences and
off-site training.
Depreciation $91,000 Included is the per head share of
workstation depreciation, the Cascade HP
platform depreciation, and the depreciation
expense associated with capitalized
software purchases.
Rents/Leases $98,000 Expenses associated with the Mach1
computing platforms.
Other Supplies $153,000 Incidental expenses associated with things
and Expenses such as training, reward and recognition,
long distance phone charges, miscellaneous
office supplies.
Total Costs $1,800,000
 Earned Value
Progress is compared against the Planned Value
(PV) – Budgeted
baseline to determine whether Cost
project is ahead of or behind plan Earned Value
(EV) – Actual
Percent complete can be difficult work completed
to measure, some managers use Actual Cost (AC)
rules – Costs incurred
Estimate to
 50/50 Rule – Assumed 50% Complete (ETC)
complete when task started, final – What’s Left
50% at completion Estimate at
 20/80 Rule – 20% at start Completion
(EAC) – What
 0/100 Rule – No credit until complete final cost will be
Earned Variance at
Completion

Value (VAC)

Graph Target
Cost &
Schedule

Planned
Schedule
Value (PV) Variance
(Time)

Earned
Value (EV)
 Earned Value Formulas
NAME FORMULA NOTES
Cost Variance (CV) EV-AC Negative = Over budget
Positive = Under budget
Schedule Variance EV-PV Negative = Behind Schedule
(SV) Positive = Ahead of Schedule
Cost Performance EV/AC How much are we getting for every
Index (CPI) dollar we spend?
Schedule Perform EV/PV Progress as % against plan
Index (SPI)
Estimate to EAC-AC How much more do we have to
Complete (ETC) spend?
Variance at BAC-EAC At the end of the day, how close will
Completion (VAC) we be to plan?
Estimate at See following slide
Completion (EAC)
 Earned Value Formulas (Cont’d)
NAME FORMULA NOTES
Estimate at
Completion (EAC)
BAC/CPI Use if no variances from
BAC have occurred

AC+ATC Use when original

estimate was bad. Actuals
+ New estimate

AC+BAC-EV Use when current

variances are not expected
to be there in the future
AC+(BAC-EV)/CPI Use when current
variances are expected to
continue
 Tricks for Earned Value
EV is always first
Variance = EV minus something
Index = EV divided by something
If the formula relates to cost use AC
If the formula relates to schedule use PV
Interpreting results: negative is bad and positive is good
Interpreting results: greater than one is good, less than
one is bad

Project Current
Start Status BAC
PV
EAC
AC ETC
Example: . Earned Value Calculations for
One Activity After First Week
Example: Earned Value Calculations for a
One-Year Project After Five Months
 Example Figure:Earned Value
Chart for Project After Five Months

View publication stats