2. 2013-12-27
What is Cost ?
A resource sacrificed or forgone to
achieve a specific objective.
(Measure in monetary amount)
ทรัพยากรที่เราสูญเสียไป เพื่อให้บรรลุตามวัตถุประสงค์ที่วางไว้
3. 2013-12-27
Project Cost Management
“The processes involved in planning, estimating, budgeting, and controlling costs
so that the budget can be completed within the approved budget”
Allocating overall cost
estimate to individual
work items
“Cost baseline”
Developing an
estimate of costs of
the resources
needed to complete
a project
Controlling change to
project budget
4. 2013-12-27
Why Do We Manage Cost?
› 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
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?
5. 2013-12-27
Cost Management : Project Cost
› Labor แรงงาน
–Hiring & paying the various
personnel (workers) involved in
developing the project
–Ex: Salary , Hourly rate , Pension
, Health benefit
› Materials วัตถุดิบ
–Material costs apply to specific
equipment and supplies the
project team will require in order
to complete project tasks.
–Ex : Software package
6. 2013-12-27
Cost Management : Project Cost
› Subcontractors แรงงานจ้างข้างนอก
–Ex: marketing communications professional
to design the project’s promotional material
–Consultant / Expertise
› Equipment and facilities อุปกรณ์หรือสถานที่
–Rental of equipment , rental office , etc.
› Travel ค่าใช้จ่ายการเดินทาง
–Business travel (car rental, airfare, hotels,
and meals)
7. 2013-12-27
Cost Management : Project Cost
Another way to examine project cost nature of the cost themselves
1) Type of cost : Direct or Indirect
–Direct cost : Clearly assigned to the project
› Labor and material costs
Direct labor rate X Total labor hours = Total direct labor cost
› Material cost : All project purchase orders (PO)
–Indirect cost :
› Overhead costs , Administration
› Ex of overhead cost : Indirect materials, utilities , taxes, insurance, property and repairs
etc.
8. 2013-12-27
Cost Management : Project Cost
2) Frequency of occurrence : Recurring or Non recurring
›Non recurring cost
- Charges applied once at the beginning or end of the project
- Ex : Marketing analysis, Training , Outplacement services
›Recurring cost
- Continue to operate over the project’s life cycle
- Ex : Labor, Material , Logistics, Sales costs
9. 2013-12-27
Cost Management : Project Cost
3) Opportunities to be adjusted : Fixed or Variable
›Fixed costs
- Do not vary with respect to their usage
- Ex : Leasing equipment or project hardware
›Variable costs
- Cost that accelerate or increase through usage
- Cost is in direct proportion to the usage level
10. 2013-12-27
Cost Management : Project Cost
4) Schedule : Normal or Expedited Costs
› Normal costs
- Incurred in the routine process of working to complete the project according
to original planned schedule agreed to by all stakeholder at the beginning of
the project.
›Expedited costs
- Unplanned costs incurred when steps are taken to speed up the project’s
completion.
11. 2013-12-27
Cost Management : Project Cost
Costs Direct
Labor
Building Lease Expedite
Costs
Material
Type Direct X X X
Indirect X
Frequency Recurring X X X
Non recurring X
Adjustment Fixed X X
Variable X X
Schedule Normal X X X
Expedited X
Cost Classifications
14. 2013-12-27
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
WBS, rolled up into project estimate [slow, most accurate]
› Parametric estimating – Use mathematical model (i.e. cost per sq
ft). [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
15. 2013-12-27
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]
16. 2013-12-27
Cost Estimating
Sample of Maximum Departmental Headcounts by Year
From Northwest Airlines – New Reservation System
Department YR 1 YR2 YR 3 YR4 YR5 Totals
Information System 24 31 35 13 13 116
Marketing System 3 3 3 3 3 15
Reservation 12 29 33 9 7 90
Contractors 2 3 1 0 0 6
Totals 41 66 72 25 23 227
A large percentage of total project costs are often labor costs.
17. 2013-12-27
Cost Estimating
Typical problems with IT Cost Estimates
Many IT project cost estimates are still very
inaccurate , especially those involving new
technologies or software development. Tome
Demarco suggests 4 reasons for the inaccuracies :
1. Complex task & estimate done before clear
system requirements
2. Inexperience in cost estimate
3. Underestimation
4. Ask for estimate from management
18. 2013-12-27
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
19. 2013-12-27
Determine Budget
Input OutputTool & Technique
Cost aggregation
Reserve analysis
Parametric estimating
Funding limit reconciliation
Cost Baseline
Project Funding
Requirements
Cost Management Plan
Updates
Requested Changes
Project Scope Statement
Work Breakdown Structure
WBS Dictionary
Activity Cost Estimates
Activity Cost Estimates
Supporting Detail
Project Schedule
Resource Calendars
Contract
Cost Management Plan
• Involve allocating the project cost estimate to individual work items over time
The work items are based on the work breakdown structure (WBS) for the project.
• Main goal: to produce a cost baseline for measuring project performance & project
funding requirement
Cost Baseline Time-phased budget that project manager use to measure and monitor cost performance
20. 2013-12-27
Determine Budget
Sample Time-based Budget
Activity Months
JAN FEB MAR APR MAY TOTAL
Survey 4,000 4,000
Design 5,000 3,000 8,000
Clear Site 4,000 4,000
Foundation 7,500 7,500
Framing 8,000 2,000 10,000
Plumb and Wire 1,000 4,000 5,000
Monthly Planned 4,000 9,000 10,500 9,000 6,000
Cumulative 4,000 13,000 23,500 32,500 38,500 38,500
22. 2013-12-27
Control Costs
Input OutputTool & Technique
Cost Baseline
Project Funding
Requirements
Performance Reports
Work Performance
Information
Approved Change
Requests
Project Management Plan
• Cost change control system
• Performance measurement
analysis
• Forecasting
• Project performance reviews
• Project management
software
• Variance management
Cost Estimate Updates
Cost Baseline Updates
Performance Measurements
Forecasted Completion
Requested Changes
Recommended Corrective
Actions
Organizational Process
Assets Updates
Project Management Plan
Updates
• Monitoring cost performance
• Ensure that changes are included in cost baseline
• Inform stakeholders of authorized changes which impacts to cost
23. 2013-12-27
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?
24. 2013-12-27
Earned value management (EVM)
• Progress is compared against the baseline to
determine whether project is ahead of or behind
plan
• Focus on tracking
• actual performance VS planned performance
• % of completion data in making calculation
• IT don’t have good planning information so
tracking performance against plan will mislead
information
• Estimate % of completion tasks might mislead
information , percent complete can be difficult to
measure, some managers use rules
• 50/50 Rule – Assumed 50% complete when task started,
final 50% at completion
• 20/80 Rule – 20% at start
• 0/100 Rule – No credit until complete
• Planned Value (PV) – Budgeted Cost
• Earned Value (EV) – Actual work
completed
• Actual Cost (AC) – Costs incurred
• Estimate to Complete (ETC) – What’s
Left
• Estimate at Completion (EAC) – What
final cost will be
• Cost control technique
• Project performance measurement
technique, integrate scope, time,
cost data
• Project managers and team can
determine how well project is
meeting scope , time and cost goal
by comparing actual information
with base line
25. 2013-12-27
Control Costs : Earned Value Formulas
TERM FORMULA NOTES
Earned Value (EV) EV = PV to date X RP
Cost Variance (CV) CV = EV – AC Negative = Over budget
Positive = Under budget
Schedule Variance (SV) SV = EV – PV Negative = Behind Schedule
Positive = Ahead of Schedule
Cost Performance Index CPI = EV / AC How much are we getting for every dollar we
spend?
Schedule Performance Index SPI – EV / PV Progress as % against plan
Estimated at Completion (EAC) EAC = BAC / CPI How much more do we have to spend?
Estimated Time to Complete Original Time Estimate/SPI How much time will we complete ?
Planed Value (PV) : Budget Cost of Work Schedule
Actual Cost (AC) : Actual Cost of Work Performed
Earned Value (EV) : Budget Cost of Work Performed
Rate of Performance (RP) : Ratio of actual work completed to % of work planned
26. 2013-12-27
Control Costs
Sample of Earned Value calculation for one activity after week one
Suppose the server installation was halfway completed by the end of week 1. Plan Cost = 10,000 ,
Actual Cost = 15,000, RP= 50%
Activity FORMULA Week 1
Earned Value (EV) EV = PV to date x RP = 10,000 * 50% = 5,000
Cost Variance (CV) CV = EV – AC = 5,000 – 15,000 = -10,000
Schedule Variance (SV) SV = EV – PV = 5,000-10,000 = -5,000
Cost Performance Index CPI = EV / AC = 5,000 / 15,000 = 0.33 , 33%
Schedule Performance Index SPI = EV / PV = 5,000/10,000 = 0.5 , 50%
27. 2013-12-27
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
PV
AC ETC
EAC
BAC
Project
Start
Current
Status
28. 2013-12-27
Terms to Remember
• Present Value
• Net Present Value (NPV)
• Internal Rate of Return (IRR)
• Payback Period
• Benefit Cost Ratio = BCR>1, Payback is
greater than the cost
• Opportunity Cost
• Sunk Cost
• Working Capital
• Straight Line Depreciation
• Accelerated Depreciation
• Double Declining Balance
• Sum of Years Digits
• Value Analysis (Value Engineering)
You won’t be calculating most of these numbers on the test, just remember the
concepts for general questions
