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Pmbok 4th edition chapter 7 - Project Cost Management

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Pmbok 4th edition chapter 7 - Project Cost Management

  2. 2. PM Knowledge Areas & Process GroupsPM Process Initiating Process Planning Process Group Executing Process Monitoring & Controlling ClosingGroups / Group Group Process Group ProcessKnowledge GroupArea ProcessesProject Develop Project Charter Develop Project Management Direct and Manage Project Monitor and Control Project Work Close ProjectManagement Plan Execution Integrated Change ControlIntegrationProject Scope Collect requirements Verify ScopeManagement Define Scope Control Scope Create WBSProject Time Define Activity Schedule ControlManagement Sequence Activity Estimating Resource Estimating Duration Develop ScheduleProject Cost Estimating Cost Control CostManagement Budgeting CostProject Quality Quality Planning Perform Quality Assurance Perform Quality ControlManagementProject HR Human Resources Planning Acquire Project TeamManagement Develop Project Team Manage Project TeamProject Identify Stakeholders Plan Communications Distribute Information Performance ReportingCommunications Manage stakeholdersManagement expectationsProject Risk Plan Risk Management Risk Monitoring and ControlManagement Risk Identification Qualitative / Quantitative Risk Analysis y Risk Response PlanningProject Plan procurement Conduct procurement Administer Contract CloseProcurement procurementManagement
  3. 3. Project Cost Management Monitoring & Controlling Processes Planning Processes Enter phase/ Initiating Closing Exit phase/ Start project Processes Processes End project Executing Processes ProcessKnowledge Area Monitoring & g Initiating I iti ti Planning Pl i Executing E ti Closing Cl i Control Cost Estimating Cost Cost B d ti C t Budgeting Cost Control
  4. 4. Project Cost Management
  5. 5. Project Cost ManagementProject Cost Management includes the processes involved in estimating, budgeting, and controlling costs so that the project can be completedwithin the approved budget. Figure 7‐1 provides an overview of the Project within the approved budget Figure 7 1 provides an overview of the ProjectCost Management processes which include the following: 7.1 Estimate Costs The process of developing an approximation of the monetary 7.1 Estimate Costs—The process of developing an approximation of the monetaryresources needed to complete project activities. 7.2 Determine Budget—The process of aggregating the estimated costs of  g p gg g gindividual activities or work packages to establish an authorized cost baseline.7.3 Control Costs—The process of monitoring the status of the project toupdate the project budget and managing changes to the cost baseline. 
  6. 6. Project Cost ManagementThe cost management plan can establish the following: • Level of accuracy. Activity cost estimates will adhere to a rounding of  the data to a prescribed precision (e.g., $100, $1,000),  the data to a prescribed precision (e g $100 $1 000) based on the scope of the activities and magnitude of the project,  and may include an amount for contingencies. Units of measure. Each unit used in measurements (such as staff hours,staff days, weeks, or lump sum) is defined for each of the resources. • Organizational procedures links. The work breakdown structure (WBS)  provides the framework for the cost management plan,  allowing for consistency with the estimates, budgets,  and control of costs. The WBS component used for the project cost  d t l f t Th WBS t d f th j t t accounting is called the control account (CA). Each control account is assigned a unique code or account number(s)Each control account is assigned a unique code or account number(s)that links directly to the performing organization’s accounting system. 
  7. 7. Project Cost Management• Control thresholds:  Variance thresholds for monitoring cost performance may be specified to indicate an agreed‐upon amount of variation to be allowed before someaction needs to be taken.  ti d t b t kThresholds are typically expressed as percentage deviations from the baseline plan. • Rules of performance measurement. Earned value management (EVM) rules of performance measurement are set. For example, the cost management plan could:  ‐ Define the WBS and points at which measurement of control accounts will be performed Define the WBS and points at which measurement of control accounts will be performed,  ‐ Establish the earned value measurement techniques (e.g., weighted milestones, fixed‐ formula, percent complete, etc.) to be employed, and  ‐ Specify the earned value management computation equations for determining the projected  estimate at completion (EAC) forecasts and other tracking methodologies. 
  8. 8. Project Cost Management• Reporting formats: The formats and frequency for the various cost  reports are defined. • Process descriptions. Descriptions of each of the three cost management  processes are documented. All of this information is included in the cost management plan, a component of the project management plan, either as text within the body  t f th j t t l ith t t ithi th b dof the plan or as appendices.The cost management plan may be formal or The cost management plan may be formal orinformal, highly detailed or broadly framed, based upon the needs of the project. 
  9. 9. 7.1 Cost Estimating
  10. 10. 7.1 Cost Estimating
  11. 11. 7.1 Cost Estimating 7.1 Cost Estimating• Estimate Costs is the process of developing an approximation  y p of the monetary resources needed to complete • Cost estimates are generally expressed in units of some  currency (i.e., dollars, euro, yen, etc.), although in some  instances other units of measure, such as staff hours or staff  days, a e used to ac tate co pa so s by e days, are used to facilitate comparisons by eliminating the  at g t e effects of currency fluctuations. • Cost estimates should be refined during the course of the  project to reflect additional detail as it becomes available.  11
  12. 12. 7.1 Cost Estimating 7.1 Cost Estimating• The accuracy of a project estimate will increase as the project  p g progresses through the project life cycle.  g p j y• Hence cost estimating is an iterative process from phase to  phase. For example, a project in the initiation phase could  have a rough order of magnitude (ROM) estimate in the range  o 50% of ±50%. • Later in the project, as more information is known, estimates  could narrow to a range of ±10%. In some organizations, there  are guidelines for when such refinements can be made and  the degree of accuracy that is expected.  the degree of accuracy that is expected. 12
  13. 13. 7.1 Cost Estimating 7.1 Cost Estimating• Costs are estimated for all resources that will be charged to  p j the project. • This includes, but is not limited to, labor, materials,  equipment, services, and facilities, as well as special  categories such as an inflation allowance or contingency costs. • A cost estimate is a quantitative assessment of the likely costs  for resources required to complete the activity.  13
  14. 14. Table 7 3. Types of Cost Estimates Table 7‐3. Types of Cost Estimates Type of Estimate When Done Why Done How AccurateRough 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 j t b f project completionBudgetary Early, 1–2 years out Puts dollars in the –10%, +25% budget plansDefinitive Later in the project, < Provides details for –5%, +10% 1 year out purchases, estimate actual costs l 14
  15. 15. Estimates Charter PlanPre-LaunchP L h Approval Launch L h Approval Execute Size Estimates (Macro) Task-based Estimates Project Schedule +/- 35% range +/- 15% range +/- 10% range 15
  16. 16. Quality/Accuracy of Cost  Estimation Estimate AccuracyRough Order • Most difficult to estimate as very little project infoof Magnitude +/- 50% is available, made during initiating process(ROM) -10% • Used to finalize the Request for AuthorizationBudget (RFA), and establish commitment, made duringEstimateE i +25% planning phaseDefinitive -5% • During the project and refinedEstimate 10%
  17. 17. Types of Cost• Variable Costs – Change with the amount of production/work  – e.g. material, supplies, wages l l• 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 Indirect Costs – overhead or cost incurred for benefit of more than one project – e.g. taxes, fringe benefit, janitorial services
  18. 18. Project Cost Management• The process involved in estimating, budgeting, and controlling cost so that the project can be completed within approved budget p j p pp g• Life cycle costing – Looking at the cost of whole life of the p g product ( (include maintenance)• Value analysis (value engineering) – Looking at less costly way to do the same work within the same scope• Law Time value of money (depreciation) • of Diminishing Returns –•E.g. will also affect the schedule to task may not get the task Cost adding twice resource •done in vs Type of contract Cost risk vs. cost/time half
  19. 19. 7.1 Cost Estimating  7.1 Cost Estimating ‐ Inputs• 1. Scope Baseline Scope statement. The scope statement (Section provides the product  description, acceptance criteria, key deliverables, project boundaries,  assumptions, and constraints about the projectWork breakdown structure. The project WBS (Section provides the  relationships among all the components of the project and the project  p g p p j p j deliverables (Section WBS dictionary. The WBS dictionary (Section and related detailed WBS dictionary The WBS dictionary (Section 5 3 3 2) and related detailed statements of work provide an identification of the deliverables and a  description of the work in each WBS component required to produce each  deliverable.  19
  20. 20. 7.1 Cost Estimating  7.1 Cost Estimating ‐ Inputs2. Project Schedule • The type and quantity of resources and the amount of time which those  resources are applied to complete the work of the project are major  factors in determining the project cost. • Schedule activity resources and their respective durations are used as key  inputs to this process.  p p• Estimate Activity Resources (Section 6.3) involves determining the  availability and quantities required of staff and material needed to  availability and quantities required of staff and material needed to perform schedule activities.  20
  21. 21. 7.1 Cost Estimating  7.1 Cost Estimating ‐ Inputs3. Human Resource Plan • Project staffing attributes, personnel rates, and related   rewards/recognition  (Section are necessary components for  developing the project cost estimates. 4. Risk Register • The risk register (Section should be reviewed to consider risk  The risk register (Section 11 2 3 1) should be reviewed to consider risk mitigation costs. • Risks, which can be either threats or opportunities, typically have an  impact on both activity and overall project costs.  impact on both activity and overall project costs• As a general rule, when the project experiences a negative risk event, the  near‐term cost of the project will usually increase, and there will  sometimes be a delay in the project schedule.  sometimes be a delay in the project schedule 21
  22. 22. 7.1 Cost Estimating  7.1 Cost Estimating ‐ Inputs5. Enterprise Environmental Factors • The enterprise environmental factors that influence the Estimate Costs  process include, but are not limited to:  Market conditions. Market conditions describe what products, services,  and results are available  in the market, from whom, and under what  terms and conditions. Regional and/or global supply and demand  g / g pp y conditions greatly influence resource costs.  Published commercial information. Resource cost rate information is often  Published commercial information Resource cost rate information is often available from commercial databases that track skills and human resource  costs, and provide standard costs for material and equipment. Published  p seller price lists are another source of information.  22
  23. 23. 7.1 Cost Estimating  7.1 Cost Estimating ‐ Inputs6. Organizational Process Assets • The organizational process assets that influence the Estimate Costs  process include but are not limited to:  – Cost estimating policies,  – Cost estimating templates,  – Historical information, and  – Lessons learned.  23
  24. 24. 7.1 Cost Estimating  Tools and Techniques7.1 Cost Estimating ‐ Tools and Techniques1. Expert Judgment  Cost estimates are influenced by numerous variables such as  labor rates, material costs, inflation, risk factors, and other  variables. 2. Analogous Estimating “Top‐down Estimating”2 Analogo s Estimating “Top do n Estimating” Analogous cost estimating uses the values of parameters,  Analogous cost estimating uses the values of parameters such as scope, cost, budget, and duration or measures of scale  such as size, weight, and complexity, from a previous, similar  project as the basis  for estimating the same parameter or  j t th b i f ti ti th t measure for a current project. 24
  25. 25. 7.1 Cost Estimating  Tools and Techniques7.1 Cost Estimating ‐ Tools and Techniques• When estimating costs, this technique relies on the actual  cost of previous, similar projects as the basis for estimating  p , p j g the cost of the current project.• Analogous cost estimating uses historical information and  expert judgment. • Analogous cost estimating is generally less costly and time  consuming than other techniques, but it is also generally less  accurate.• Analogous cost estimates can be applied to a total project or  to segments of a project, used in conjunction with other  to segments of a project used in conjunction with other estimating methods.  25
  26. 26. 7.1 Cost Estimating  Tools and Techniques7.1 Cost Estimating ‐ Tools and Techniques3. Parametric Estimating • Parametric estimating uses a statistical relationship between  historical data and other variables (e.g., square footage in  construction) to calculate an estimate for activity parameters,  such as cost, budget, and duration.• This technique can produce higher levels of accuracy  depending upon the sophistication and underlying data built  into the model. • Parametric cost estimates can be applied to a total project or  to segments of a project, in conjunction with other estimating  to segments of a project in conjunction with other estimating methods.  26
  27. 27. 7.1 Cost Estimating  Tools and Techniques7.1 Cost Estimating ‐ Tools and Techniques4. Bottom‐Up Estimating • Bottom‐up estimating is a method of estimating a component  of work. • The cost of individual work packages or activities is estimated  with the greatest level of specified detail. • The detailed cost is then s mmari ed or “rolled p” to higher The detailed cost is then summarized or “rolled up” to higher  levels for subsequent reporting and tracking purposes. • The cost and accuracy of bottom‐up cost estimating is  y p g typically influenced by the size and complexity of the  individual activity or work package.  27
  28. 28. 7.1 Cost Estimating  Tools and Techniques7.1 Cost Estimating ‐ Tools and Techniques5. Three‐Point Estimates • The accuracy of single‐point activity cost estimates can be  improved by considering estimation uncertainty and risk. • This concept originated with the program evaluation and  review technique (PERT).  re ie techniq e (PERT)• PERT uses three estimates to define an approximate range for PERT uses three estimates to define an approximate range for  an activity’s cost. 28
  29. 29. 7.1 Cost Estimating ‐ Tools and TechniquesPERT analysis calculates an Expected (Te) activity duration using a weighted average of these three estimates: Te = (To+4Tm+Tp)/ 6 Te = (To+4Tm+Tp)/ 6Duration estimates based on this equation (or even on a  q (simple average of the three points) may provide more accuracy, and the three points clarify the range of uncertainty 0f the duration estimates.0f the duration estimates
  30. 30. Points Estimate  (PERT) Expected Standard Variance Deviation P + 4Μ + Ο P−Ο ⎡P − Ο2 ⎤ ⎢ ⎥ 6 6 ⎣ 6 ⎦ SD= S ∑variance a a ce
  31. 31. 7.1 Cost Estimating  Tools and Techniques7.1 Cost Estimating ‐ Tools and Techniques7. Cost of Quality (COQ) • Assumptions about costs of quality (Section may be  used to prepare the activity cost estimate. 8. Project Management Estimating Software • Project management cost estimating software applications,  computerized spreadsheets, simulation, and statistical tools  computerized spreadsheets simulation and statistical tools are becoming more widely accepted to assist with cost  estimating.  31
  32. 32. 7.1 Cost Estimating  Tools and Techniques7.1 Cost Estimating ‐ Tools and Techniques9. Vendor Bid Analysis • Cost estimating methods may include analysis of what the  project should cost, based on the responsive bids from  qualified vendors. • Where projects are awarded to a vendor under competitive  processes, additional cost estimating work can be required of  processes additional cost estimating work can be required of the project team to examine the price of individual  deliverables and to derive a cost that supports the final total  project cost.  j 32
  33. 33. 7.1 Cost Estimating  7.1 Cost Estimating ‐ output1. Activity Cost Estimates • Activity cost estimates are quantitative assessments of the  probable costs required to complete project work. • Cost estimates can be presented in summary form or in detail. • Costs are estimated for all resources that are applied to the  activity cost estimate.  activity cost estimate• This includes, but is not limited to, direct labor, materials,  equipment, services, facilities, information technology 33
  34. 34. 7.1 Cost Estimating  7.1 Cost Estimating ‐ output2. Basis of Estimates • The amount and type of additional details supporting the cost  estimate vary by application area. • Regardless of the level of detail, the supporting  documentation should provide a clear and complete  doc mentation sho ld pro ide a clear and complete• understanding of how the cost estimate was derived. • Supporting detail for activity cost estimates may include: • Documentation of the basis of the estimate (i.e., how it was  developed),  34
  35. 35. 7.1 Cost Estimating  7.1 Cost Estimating ‐ output3. Project Document Updates • Project documents that may be updated include, but are not  limited to, the risk register.  35
  36. 36. 7.2 Cost Budgeting
  37. 37. 7.2 Cost Budgeting
  38. 38. 7.2 Determine Budget 7.2 Determine Budget• Determine Budget is the process of aggregating the estimated  p g costs of individual activities or work packages to establish an  authorized cost baseline.• This baseline includes all authorized budgets, but excludes  management reserves. • Project budgets constitute the funds authorized to execute  the project. • Project cost performance will be measured against the  authorized budget.  th i d b d t 38
  39. 39. 7.2 Determine Budget  7.2 Determine Budget ‐ Inputs1. Activity Cost Estimates  Cost estimates (Section for each activity within a work  package are aggregated to obtain a cost estimate for each  work package. 2. Basis of Estimates 2 Basis of Estimates Any basic assumptions dealing with the inclusion or exclusion  Any basic assumptions dealing with the inclusion or exclusion of indirect costs in the project budget are specified in the  basis of estimates.  39
  40. 40. 7.2 Determine Budget  7.2 Determine Budget ‐ Inputs3. Scope Baseline  Scope Statement, Work breakdown structure, WBS dictionary.  Scope Statement Work breakdown structure WBS dictionary4. Project Schedule  j• The project schedule (Section, as part of the project  management plan, includes planned • start and finish dates for the project’s activities, milestones,  work packages, planning packages, and control accounts. work packages planning packages and control accounts• This information can be used to aggregate costs to the  calendar periods in which • the costs are planned to be incurred.  40
  41. 41. 7.2 Determine Budget  7.2 Determine Budget ‐ Inputs5. Resource Calendars • Resource calendars provide information on which resources  are assigned to the project and when they are assigned. • This information can be used to indicate resource costs over  the duration of the project. 6. Contracts • Applicable contract information and costs relating to  products, services, or results that have been • purchased are included when determining the budget.  41
  42. 42. 7.2 Determine Budget  7.2 Determine Budget ‐ Inputs7. Organizational Process Assets • The organizational process assets that influence the  Determine Budget process include, but are not limited to:  – Existing formal and informal cost budgeting‐related policies,  procedures, and guidelines,  – Cost budgeting tools, and  – Reporting methods.  42
  43. 43. 7.2 Determine Budget  Tools and techniques  7.2 Determine Budget – Tools and techniques1. Cost Aggregation • Cost estimates are aggregated by work packages in  accordance with the WBS.• The work package cost estimates are then aggregated for the  higher component levels of the WBS (such as control  higher component le els of the WBS (s ch as control accounts) and ultimately for the entire project.  43
  44. 44. Cost Aggregation• Reserves & risk management are  Cost Budget important  while estimating! Management reserves – Contingency reserves:  Cost  Baseline  Cost baseline the cost impacts of the  the cost impacts of the Contingency reserves C ti remaining risk Project estimates –M Management reserves:  t Cost  C t Control account estimates Budget Work package estimates extra fund to cover unforeseen  risk or changes to the project Activity estimates
  45. 45. Cash Flow, Cost Baseline and Funding , g
  46. 46. 7.2 Determine Budget  Tools and techniques  7.2 Determine Budget – Tools and techniques2. Reserve Analysis • Budget reserve analysis can establish both the contingency  reserves and the management reserves for the project. • Contingency reserves are allowances for unplanned but  potentially required changes that can result from realized risks  potentiall req ired changes that can res lt from reali ed risks identified in the risk register. • Management reserves are budgets reserved for unplanned  changes to project scope and cost. 46
  47. 47. 7.2 Determine Budget  Tools and techniques  7.2 Determine Budget – Tools and techniques3. Expert Judgment • Judgment provided based upon expertise in an application  area, Knowledge Area, discipline, industry, etc., as appropriate  for the activity being performed should be used in  determining the budget. • Such expertise may be provided by any group or person with  specialized education, knowledge, skill, experience, or  training.  47
  48. 48. 7.2 Determine Budget  Tools and techniques  7.2 Determine Budget – Tools and techniques4. Historical Relationships • Any historical relationships that result in parametric estimates  or analogous estimates involve the use of project  characteristics (parameters) to develop mathematical models  to predict total project costs. • Such models can be simple (e.g., residential home  construction is based on a certain cost per square foot of  space) or complex (e.g., one model of software development  costing uses multiple separate adjustment factors, each of  which has numerous points within it).  which has numerous points within it). 48
  49. 49. 7.2 Determine Budget  Tools and techniques  7.2 Determine Budget – Tools and techniques5. Funding Limit Reconciliation • The expenditure of funds should be reconciled with any  funding limits on the commitment of funds for the project. • A variance between the funding limits and the planned  expenditures will sometimes necessitate the rescheduling of  e pendit res ill sometimes necessitate the resched ling of work to level out the rate of expenditures. • This can be accomplished by placing imposed date constraints  for work into the project schedule.  49
  50. 50. 7.2 Determine Budget  7.2 Determine Budget – Outputs1. Cost Performance Baseline • The cost performance baseline is an authorized time‐phased  budget at completion (BAC) used to measure, monitor, and  control overall cost performance on the project. • It is de eloped as a s mmation of the appro ed b dgets b It is developed as a summation of the approved budgets by  time period and is typically displayed in the form of an S‐ curve. 50
  51. 51. 7.2 Determine Budget  7.2 Determine Budget – Outputs2. Project Funding Requirements • Total funding requirements and periodic funding  requirements (e.g., quarterly, annually) are derived from the  cost baseline. • The cost baseline ill incl de projected e pendit res pl s The cost baseline will include projected expenditures plus  anticipated liabilities.  51
  52. 52. 7.2 Determine Budget  7.2 Determine Budget – Outputs3. Document Updates • Project documents that may be updated include but are not Project documents that may be updated include but are not  limited to:  – Risk register,  – Cost estimates, and  – Project schedule.  52
  53. 53. 7.3 Cost Control
  54. 54. 7.3 Cost Control
  55. 55. 7.3 Control Cost 7.3 Control Cost• Control Costs is the process of monitoring the status of the  p j project to update the project budget and managing changes  p p j g g g g to the cost baseline.• Project cost control includes:1. Influencing the factors that create changes to the authorized 1 Infl encing the factors that create changes to the a thori ed cost baseline, 2. Ensuring that all change requests are acted on in a timely  g g q y manner, 3. Managing the actual changes when and as they occur, 4. Ensuring that cost expenditures do not exceed the  authorized funding, by period and in total for the project,  55
  56. 56. 7.3 Control Cost 7.3 Control Cost5. Monitoring cost performance to isolate and understand  pp , variances from the approved cost baseline, 6. Monitoring work performance against funds expended, 7. Preventing unapproved changes from being included in the  reported cost or resource usage,  reported cost or reso rce sage8. Informing appropriate stakeholders of all approved changes  and associated cost,,9. Acting to bring expected cost overruns within acceptable  limits. 56
  57. 57. 7.3 Control Cost  7.3 Control Cost ‐ Inputs1. Project Management Plan • The project management plan described in Section  contains the following information that is used to control cost: • Cost Performance baseline. The cost performance baseline is  compared with actual results to determine if a change,  compared ith act al res lts to determine if a change corrective action or preventive action is necessary.  57
  58. 58. 7.3 Control Cost  7.3 Control Cost ‐ Inputs2. Project Funding Requirements• Project funding requirements are described in Section 3. Work Performance Information • Work performance information includes information about  project progress, such as which deliverables • have started their progress and which deliverables have have started, their progress and which deliverables have  finished.• Information also includes costs that have been authorized  and incurred, and estimates for completing project work.  58
  59. 59. 7.3 Control Cost  7.3 Control Cost ‐ Inputs4. Organizational Process Assets • The organizational process assets that can influence the  Control Costs process include, but are not limited to:  – Existing formal and informal cost control‐related policies, procedures,  and guidelines;  – Cost control tools; and  – Monitoring and reporting methods to be used.  59
  60. 60. 7.3 Control Cost  Tools and techniques  7.3 Control Cost – Tools and techniques1. Earned Value Management • Earned value management (EVM) in its various forms is a  commonly used method of performance measurement.• It integrates project scope, cost, and schedule measures to  help the project management team assess and measure  help the project management team assess and meas re project performance and progress.• It is a project management technique that requires the  formation of an integrated baseline against which  performance can be measured for the duration of the project.  f b d f th d ti f th j t 60
  61. 61. What Is Earned Value Analysis? What Is Earned Value Analysis? WBS Formal Reporting System Project Schedule Earned Value Early Warning & DetectionResource Planning/ Informed Management Cost Estimating Management Decisions Define/Assign Corrective Actions Schedule/Budget System Recovering Planning Establish Baseline uthorization Time Sheet System Work Au t 61
  62. 62. Planned Value (PV) [was Budgeted Cost of Work Planned Value (PV) [was Budgeted Cost of Work Scheduled (BCWS)]How much work should be done (what you planned to do) JAN FEB MAR APR MAY 40 40 40 100 60 Work Package #1 100 50 70 20 Work Package #2 g 40 40 60 Work Package #3 50 70 60 120 Work Package #4 PV = 140 180 220 240 180 BAC = 960 Cumulative PV = 540 62
  63. 63. Earned Value (EV) [was Budgeted Cost of Work  ( )[ g Performed (BCWP)] How much work is done on a budgeted basis (what you’ve actually done) d ) Work completed during a given period of time = “Earned Value” JAN FEB MAR APR MAY 40 40 40 100 60 Work Package #1 100% Complete (280) 100 50 70 20 Work Package #2 75% Complete (180) 40 40 60 Work Package #3 50% Complete (70) 50 70 60 120 Work Package #4 20% Complete (60) PV = 140 180 220 240 180 BAC = 960 PV = 540 EV = 590 63
  64. 64. Actual Cost (AC) [was Actual Cost of Work  Performed (ACWP)]How much did the “is done” work cost (what you actually is donespent or what it actually cost) JAN FEB MAR APR MAY 40 40 40 100 60 Work Package #1 100% Complete (280) 100 50 70 20 Work Package #2 75% Complete (180) 40 40 60 Work Package #3 50% Complete (70) 50 70 60 120 Work Package #4 20% Complete (60) PV = 140 180 220 240 180 BAC = 960 PV = 540 EV = 590 AC = 560 (not calculated here) 64
  65. 65. Schedule Variance (SV) Schedule Variance (SV)• EV ‐ PV: “Value of Work Performed less value of Work Scheduled”• *A Negative number indicates a “Potential Slip”• Schedule Variance status does: Example: – indicate the dollar value difference between  – work that is ahead or behind the plan PV = $ $250 – reflect a given measurement method EV = $200• Schedule Variance status does not: SV = EV - PV – address impact of work sequence – address importance of work = $200 - $250 – reflect critical path assessment = - $50 – indicate amount of time it will slip i di t t f ti it ill li – identify source (labor & material) of difference – indicate the time ahead/behind (or regain) schedule – indicate the cost needed to regain schedule indicate the cost needed to regain schedule 65
  66. 66. Cost Variance (CV) Cost Variance (CV)EV - AC: “Value of Work Performed for Each Dollar’s Value Dollar sWorth of Work Scheduled”*A Negative number indicates an “Overrun” Example: p EV = $200 AC = $190 CV = EV - AC = $200 - $190 = $10 66
  67. 67. Schedule Performance Index (SPI) Schedule Performance Index (SPI)Is a Measure of Contractor “Schedule Efficiency” Schedule Efficiency Example: SPI = EV/PV PV = $250 EV = $200 SPI = EV/PV = $200/$250 = .80 80 Less Than 1.0 is unfavorable = BEHIND schedule Greater Than 1.0 is favorable = AHEAD of schedule 67
  68. 68. Cost Performance Index (CPI) Cost Performance Index (CPI)Is a Measure of Contractor “Cost Efficiency Cost Efficiency” Example: CPI = EV/AC EV = $200 AC = $190 CPI = EV/AC = $200/$190 = 1.05 1 05 Less Than 1.0 is unfavorable = Cost is GREATER than budgeted Greater Than 1.0 is favorable = Cost is LESS than budgeted 68
  69. 69. 7.3 Control Cost  Tools and techniques  7.3 Control Cost – Tools and techniques2. Forecasting • As the project progresses, the project team can develop a  forecast for the estimate at completion (EAC) that may differ  from the budget at completion (BAC) based on the project  performance. • If it becomes obvious that the BAC is no longer viable, the  project manager should develop a forecasted EAC.  69
  70. 70. Budget at Completion (BAC) Budget at Completion (BAC)What is Budget at Completion (BAC) • Sum of the total budgets for a p j g projectBAC = Cum PV (BCWS) for all work packages in thep jproject 70
  71. 71. Forecasting ‐ Estimate at Completion (EAC) g p ( )What is Estimate at Completion (EAC) • Expected total cost for a defined scope of work • Forecast of most likely total project costTechniques for developing EAC:EAC = Actuals to date plus a new estimate for all remaining work (AC + ETC) *What is ETC? Estimate to Complete (ETC) is the cost for all remaining What work.EAC = BAC/CPI Total project budget divided by the cost performance indexEAC = AC +BAC – EVEAC = AC + (BAC – EV)/CPI ( ) 71
  72. 72. Forecasting EAC• Common alternative way to calculate EAC Table captured from Practice Standard for Earned Value Management, PMI © 2005
  73. 73. Earned Value Graph Earned Value GraphCost$360M EAC (Forecast) Cost Overrun$300M BAC (Total Budget) BCWS (PV) (Planned)Spending ACWP (AC)Variance (Actual) Cost CPISchedule VarianceVariance Schedule BCWP (EV) Slippage (Accomplishment) 24 Mos. 40 Mos. 52 Mos. Time 73
  74. 74. Earned Value Technique Terms and Formulas DefinitionBudget tB d t at completion (BAC) l ti How H much did we BUDGET for the TOTAL project effort? h f th j t ff t?Estimate at Completion (EAC) What do we currently expect the TOTAL project cost (a= BAC / CPI forecast)? f t)?Estimate to Complete (ETC) From this point on, how much MORE do we expect it to cost to= EAC - AC finish the project (a forecast)?Variance at Completion (VAC) As of today, how much over or under budget do we expect to= BAC – EAC be at the end of the project?• EAC is an important forecasting value.
  75. 75. Earned Value: Graphical  Representation TODAY (Reporting day) Projection of schedule delay at completion Estimate at CompletionEAC ( (EAC) ) Projection of cost variance at completionBAC (VAC)AC Budget at Completion (BAC) COST Cost Variance (CV)PV Schedule Variance (SV) ACTUALEV PLAN EARN VALUE TIME Project is over budget & behind schedule
  76. 76. Earned Value Management EV can b calculated by be db (%progress) x (planned man-days)Image captured from Practice Standard for Earned Value Management, PMI © 2005
  77. 77. 7.3 Control Cost  Tools and techniques  7.3 Control Cost – Tools and techniques4. To‐Complete Performance Index (TCPI) • The to‐complete performance index (TCPI) is the calculated  projection of cost performance that must be achieved on the  remaining work to meet a specified management goal, such  as the BAC or the EAC. • If it becomes obvious that the BAC is no longer viable the If it becomes obvious that the BAC is no longer viable, the  project manager develops a forecasted estimate at  completion (EAC). • Once approved, the EAC effectively supersedes the BAC as • the cost performance goal. Equation for the TCPI based on the  BAC: (BAC – EV) / (BAC – AC).  BAC: (BAC – EV) / (BAC – AC) 77
  78. 78. 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 Work Remaining (BAC – EV)• TCPI = Funds Remaining (BAC – AC) or (EAC - AC)
  79. 79. 7.3 Control Cost  Tools and techniques 7.3 Control Cost – Tools and techniques 79
  80. 80. 7.3 Control Cost  Tools and techniques  7.3 Control Cost – Tools and techniques4. Performance Reviews • Performance reviews compare cost performance over time,  schedule activities or work packages overrunning and under  running the budget, and estimated funds needed to complete  work in progress. • If EVM is being used, the following information is determined: • Variance analysis. Variance analysis as used in EVM compares  actual project performance to • planned or expected performance. Cost and schedule  variances are the most frequently analyzed.  80
  81. 81. 7.3 Control Cost  Tools and techniques  7.3 Control Cost – Tools and techniques5. Variance analysis. • Variance analysis as used in EVM compares actual project  performance to planned or expected performance. • Cost and schedule variances are the most frequently  analyzed. • Trend analysis. Trend analysis examines project performance  over time to determine if performance is improving or  p p g deteriorating. • Graphical analysis techniques are valuable for understanding  performance to date and for comparison to future  f t d t df i t f t performance goals in the form  81
  82. 82. 7.3 Control Cost  Tools and techniques  7.3 Control Cost – Tools and techniques6. Project Management Software • Project management software is often used to monitor the  three EVM dimensions (PV, EV, and AC), to display graphical  trends, and to forecast a range of possible final project results.  82
  83. 83. 7.3 Control Cost  7.3 Control Cost – Outputs1.  Work Performance Measurements • The calculated CV, SV, CPI, and SPI values for WBS  components, in particular the work packages and control  accounts, are documented and communicated to  stakeholders. 2. Budget Forecasts • Either a calculated EAC value or a bottom‐up EAC value is  documented and communicated to stakeholders.  83
  84. 84. 7.3 Control Cost  7.3 Control Cost – Outputs3. Organizational Process Assets Updates • Organizational process assets that may be updated include,  but are not limited to:  – Causes of variances,  – Corrective action chosen and the reasons, and  – Other types of lessons learned from project cost control. Other types of lessons learned from project cost control. 4. Change Requests • Analysis of project performance can result in a change request  to the cost performance baseline or other components of the  to the cost performance baseline or other components of the project management plan.  84
  85. 85. 7.3 Control Cost  7.3 Control Cost – Outputs5. Project Management Plan Updates • Elements of the project management plan that may be  updated include, but are not limited to:  – Cost performance baseline. Changes to the cost performance baseline  are incorporated in  – response to approved changes in scope, activity resources, or cost  estimates. In some cases,  – cost variances can be so severe that a revised cost baseline is needed  to provide a realistic  – basis for performance measurement.  85
  86. 86. 7.3 Control Cost  7.3 Control Cost – Outputs6. Project Document Updates  Project documents that may be updated include, but are not  Project documents that may be updated include but are not limited to:  – Cost estimates, and  – Basis of estimates.  86
  87. 87. Summary of Terms and Formulas Summary of Terms and FormulasTERM DESCRIPTION INTERPRETATION How much work should be done (What youPV Planned Value planned to do) How much work is done on a budgeted basisEV Earned Value (What you’ve actually done) How much did the “is done” work cost (What youAC Actual Cost Actually spent)BAC Budget at Completion How much you budgeted for the total project.EAC Estimate at Completion What you currently expect the total project to cost From a given point in time, what you currentlyETC Estimate to Complete expect the remaining cost to be p gVAC Variance at Completion How much over or under budget you expect to be 87
  88. 88. Summary of Terms and FormulasSummary of Terms and Formulas NAME FORMULA INTERPRETATIONCost Variance EV-AC Negative means over budget, Positive means under budget(CV)Schedule EV PV EV-PV Negative means behind schedule, Positive means ahead of scheduleVariance (SV)V iCostPerformance EV/AC You are getting X cents out of every $1Index (CPI)SchedulePerformance EV/PV You progressing at X% of the rate originally plannedIndex (SPI)Estimate at BAC/CPI or ACCompletion What, at this time, you expect the total project to cost + ETC(EAC)Estimate toCompletion EAC - AC What, at this time, you expect the remaining scope to cost(ETC)Variance at What, at this time, you expect the final project cost to be more or lessCompletion BAC - EAC then budgeted.(VAC) 88
  89. 89. Present Value (PV) and Net Present Value (NPV)Present Value (PV) - means the value today of future cash flows orcostsPV = FV/(1 + r)n Note: FV = Future value, value r = interest rate n = number of time periodsNet Present Value (NPV) - means the total benefits less the costs.NPV is done by calculating the present value of all benefits and costs,then subtracting the total benefits from the total cost. 89
  90. 90. Internal Rate of Return (IRR): Payback Period and  Benefit Cost Ratio (BCR) B fi C R i (BCR)• Payback Period Payback Period – number of time periods it takes to recover your  investment.  The shorter time the better.• Benefit Cost Ratio (BCR) – Compares the cost to the benefits on a project.  When  dealing with multiple project options, you would  select the project with the greatest BCR.  BCR > 1   means benefits are greater than costs, BCR < 1 means  means benefits are greater than costs, BCR < 1 means costs are greater than benefits, and BCR = 1 means  they are the same. 90
  91. 91. Earned Value Management• Method to measure project performance against scope, schedule and cost baseline (performance measurement baseline)• Interpretation of basic EVM performance measures – Cost Performance Index (CPI) – Schedule Performance Index (SPI)
  92. 92. Earned Value Technique Example: Project Budget: $400K Project Schedule: 4 j At the 3 month checkpoint: Spent: $200K months Work completed: $100KTerms and Formulas Definition ExampleEarned Value (EV) As of today, what is the estimated value of the work actually accomplished? $100KActual Cost (AC) As of today, what is the actual cost incurred for the th work accomplished? k li h d? $200KPlanned Value (PV) As of today, what is the estimated value of work planned to be done? $300KCost Variance (CV) Negative is over budget $100K – $200K= EV - AC Positive is under budget = ($100K)Schedule Variance (SV) Negative is behind schedule $100K - $300K= EV - PV Positive is ahead schedule = ($200K)Cost Performance Index We are getting $__ worth of work out of every $100K/$200K(CPI) = EV/AC $1 spent. Are funds being used efficiently? = 0.5 i.e. 50%Schedule Performance We are (only) progressing at __ percent of the $100K/$300KIndexI d (SPI) = EV/PV rate originally planed = 0.33 i e 33% 0 33 i.e 4/0.33Revised Total Duration Baseline Duration/Schedule Performance Index = 12 months
  93. 93. Exercise• 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! Task Progress g Cost spent p Side 1 ||||||||||||||||||||||||||||||||||||||||100% $1,200  Side 2 ||||||||||||||||||||||||||||||||||||||||100% $1,000  Side 3 Sid 3 ||||||||||||||||||||||||||||||75% $750  $750 Side 4 ||||||||||||||||||||50% $500  Side 5 0% $0  Side 6 0% $0 
  94. 94. Exercise SolutionParameter Calculation ResultPVEVACBACCVCPISVSPIEACETCVAC Project is below/over budget? Project is late/ahead schedule? How much more money we need? H h d?
  95. 95. Exercise Solution Parameter Calculation Result PV 10 + 10 + 10 30 EV (% x ) + (% x ) + (% x 10) 10 10 10 10 75 + (% x 10) 50 3025 AC 120 + 10 + 750 + 50 3450 BAC 6 x 10 60CV 3025 - 3450 -425 CPI 3025 / 3450 .8 0 SV 3025 - 30 25 SPI 3025 / 30 .01 1 EAC 60 / 0. 8 .18 681 ETC .18 681 - 3450 .18 368 VAC 60 - 681.18 -.18 81 • over budget, getting 0.88 dollar for every dollar we spent, • ahead schedule, progressing 101% of the rate planned, • probably will spend $6818 at the end (estimation), • need $3368 to complete, • over budget at the end for about $818 (estimation)
  96. 96. Earned Schedule ‐ An emerging  EVM practice EVM practice• SPI($) – At project start SPI is reliable – At some point SPI accuracy diminishes – Toward the project end it is useless (SPI = 1 at project end) – Doest 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 See more resources about earned schedule at
  97. 97. EVM – Hints to remember• EV comes first in every formula• If it’s variance, the formula is EV – something it’ i th f l i thi• If it’s index, EV / something• If it relates to cost use Actual Cost cost,• If it relates to schedule, use PV• Negative numbers are bad, p g , positive is g good Copied from Rita’s book
  98. 98. Earned Value Chart 98
  99. 99. Basic Principles of Cost Management Basic Principles of Cost Management• Most members of an executive board have a better  understanding and are more interested in financial  terms than IT terms, so IT project managers must  speak their language. – Profits are revenues minus expenses. – Life cycle costing considers the total cost of ownership,  or development plus support costs, for a project.  – Cash flow analysis determines the estimated annual  costs and benefits for a project and the resulting annual  cash flow. 99
  100. 100. Cash Flow, Cost Baseline and Funding , g Extra reserve at end of project mulative Values s Cost baseline e FundingCum Expected Cash Flow Time 100
  101. 101. For more information do not hesitate to  contact me. Ahmad H. Maharma ‐ PMP®• Ramallah, Palestine • Phone: + (972) (2) 2968644• Mobile: + (972) (599) 001155 E‐Mail: