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INTRODUCTION
Cost Management
Project Cost Management includes the processes involved in planning, estimating, budgeting, and
controlling costs so that the project can be completed within the approved budget.
The Project Cost Management processes include the following:
•Cost Estimating
developing an approximation of the costs of the resources needed to complete project activities.
Estimating schedule activity costs involves developing an approximation of the costs of the resources
needed to complete each schedule activity. In approximating costs, the estimator considers the
possible causes of variation of the cost estimates, including risks.
•Cost Budgeting
Cost budgeting involves aggregating the estimated costs of individual schedule activities or work
packages to establish a total cost baseline for measuring project performance. The project scope
statement provides the summary budget. However, schedule activity or work package cost estimates
are prepared prior to the detailed budget requests and work authorization.
•Cost Control
Influencing the factors that create changes to the cost baseline, Ensuring requested changes are
agreed upon , Managing the actual changes when and as they occur, Assuring that potential cost
overruns do not exceed the authorized funding, periodically and in total for the project, Monitoring cost
performance to detect and understand variances from the cost baseline, Recording all appropriate
changes accurately against the cost baseline, Preventing incorrect, inappropriate, or unapproved
changes from being included in the reported cost or resource usage, Informing appropriate
stakeholders of approved changes, Acting to bring expected cost overruns within acceptable limits.
Project cost control searches out the causes of positive and negative variances and is part of
Integrated Change Control.
COST ESTIMATING
Analogous Estimating Parametric Estimating
TECHNIQUES
COST ESTIMATING : TOOLS AND
Analogous cost estimating means using the actual cost of previous, Parametric estimating is a technique that uses a statistical
similar projects as the basis for estimating the cost of the current relationship between historical data and other to calculate a
project. Analogous cost estimating is frequently used to estimate cost estimate for a schedule activity resource. This
costs when there is a limited amount of detailed information about
the project (e.g., in the early phases). Analogous cost estimating
technique can produce higher levels of accuracy depending
uses expert judgment. upon the sophistication, as well as the underlying resource
quantity and cost data built into the model.
The person determining the rates or the group reserves are estimated costs to be used at the
preparing the estimates must know the unit cost discretion of the project manager to deal with
rates, such as staff cost per hour and bulk material anticipated, but not certain, events. These events are
cost per cubic yard, for each resource to estimate “known unknowns” and are part of the project scope
schedule activity costs. Gathering quotes is one and cost baselines.
method of obtaining rates. For products, services, or
results to be obtained under contract, standard rates
with escalation factors can be included in the
contract.
Bottom-up Estimating
TECHNIQUES
COST ESTIMATING : TOOLS AND
Schedule activity cost estimates are aggregated by •Sunk Costs: A historical or expended cost. Since
work packages in accordance with the WBS. The the cost has been expended, we no longer have
work package cost estimates are then aggregated for control over the cost. Sunk costs are not included
the higher component levels of the WBS, such as when considering alternative courses of action.
control accounts, and ultimately for the entire •Fixed Costs: Nonrecurring costs that do not
project. change based on the number of units, like expenses
related to equipment required to complete a project.
Reserve Analysis
•Variable Costs: Costs that rise directly with the
Reserve analysis establishes contingency reserves, such as the size of the project, like expenses related to
management contingency reserve, that are allowances for
unplanned, but potentially required, changes. Such changes may
consumable materials used to accomplish the
result from risks identified in the risk register project.
Management contingency reserves are budgets reserved for •Indirect Costs: Costs that are part of the overall
unplanned, but potentially required, changes to project scope organization’s cost of doing business and are shared
and cost. These are “unknown unknowns,” and the project
among all the current projects. These include salaries
manager must obtain approval before obligating or spending this
reserve. Management contingency reserves are not a part of the of corporate executives, administrative expenses,
project cost baseline, but are included in the budget for the any cost that would be considered part of overhead.
project. They are not distributed as budget and, therefore, are •Opportunity Costs: The cost of choosing one
not a part of the earned value calculations.
alternative and, therefore, giving up the potential
benefits of another alternative.
•Direct Costs: Costs incurred directly by a specific
project. These include cost for materials associated
Parametric Estimating with the project, salary of the project staff, expenses
associated with subcontractors.
The parametric estimating technique involves using
project characteristics (parameters) in a
mathematical model to predict total project costs.
Models can be simple (e.g., one model of software
development costs uses thirteen separate
adjustment factors, each of which has five to seven
points within it).
COST CONTROL
Cost Change Control System Performance Measurement Analysis
TECHNIQUES
COST CONTROL : TOOLS AND
A cost change control system, documented in the Performance measurement techniques help to assess the
cost management plan, defines the procedures by magnitude of any variances that will invariably occur. The
which the cost baseline can be changed. It includes earned value technique (EVT) compares the cumulative
the forms, documentation, tracking systems, and value of the budgeted cost of work performed (earned) at
approval levels necessary for authorizing changes. the original allocated budget amount to both the
budgeted cost of work scheduled (planned) and to the
actual cost of work performed (actual).
The earned value Management involves developing these key values for each schedule
activity, work package, or control account:
Planned value (PV). PV is the budgeted cost for the work scheduled to be completed on
an activity or WBS component up to a given point in time.
Earned value (EV). EV is the budgeted amount for the work actually completed on the
schedule activity or WBS component during a given time period.
Actual cost (AC). AC is the total cost incurred in accomplishing work on the schedule
activity or WBS component during a given time period. This AC must correspond in
definition and coverage to whatever was budgeted for the PV and the EV (e.g., direct hours
only, direct costs only, or all costs including indirect costs).
Cost variance (CV). CV equals earned value (EV) minus actual cost (AC). The cost
variance at the end of the project will be the difference between the budget at completion
(BAC) and the actual amount spent. Formula: CV= EV - AC
Schedule variance (SV). SV equals earned value (EV) minus planned value (PV).
Schedule variance will ultimately equal zero when the project is completed because all of
the planned values will have been earned. Formula: SV = EV - PV
These two values, the CV and SV, can be converted to efficiency indicators to reflect the
cost and schedule performance of any project.
Cost performance index (CPI). A CPI value less than 1.0 indicates a cost overrun of the
estimates. A CPI value greater than 1.0 indicates a cost underrun of the estimates. CPI
equals the ratio of the EV to the AC. The CPI is the most commonly used cost-efficiency
indicator. Formula: CPI = EV/AC
Schedule performance index (SPI). The SPI is used, in addition to the schedule status
to predict the completion date and is sometimes used in conjunction with the CPI to
forecast the project completion estimates. SPI equals the ratio of the EV to the PV.
Formula: SPI = EV/PV
Forecasting
QUESTIONS