3. Objectves of Presentation
Through this interaction, participants
will enhance their:
•
Level of Knowledge and skills of project cost
management
•
Appreciation of the planning, estimating, budgeting
and controlling of project costs
•
Understanding of the professional cost management
methodologies, tools and techniques of PMBOK
05/19/12 3
4. file:///C:/Users/dell/Pictures/2011-09-22/014.jpg
The Presenter:
• Mr R Masilamani, collated & will lead manage
this module
Current Head of PMCE - IPD/OUM
Has a Bachelor degree in Economics &
Statistics and MBA in Finance and Management
Has worked through employee to employer
status over 35 years
• Has an active working, consulting and managing
presence in industry
05/19/12 4
5. Project Cost Management
• PMI definition
“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”
:
05/19/12 5
6. Project Cost Management
Key Words:
• project cost management, resource, planning
• estimating, budget, control, forecasting
Area of PM Application: Universal
Topic Level: Process
Related Topics: Project planning, WBS
Reference: Wideman, R.M. Cost Control of Capital Projects,
BiTech Publishers Ltd., 1995
'What is Project Cost Management, why bother and
why is it so important?'
05/19/12 6
7. – Project Cost Management (PCM)
What is PCM?
• You might think that PCM is managing the
"costs" on your project
• The reality is that you must manage
everything else that incurs cost
• Because if you don't, the costs will just keep
on climbing
• Whether you like it or not!
05/19/12 7
8. – So, what is PCM?
• Project Cost Management is
•The placing of responsibility on those in charge of any aspect
of the project
•E.g. the managers, designers and implementers
•To perform their respective roles and responsibilities within
prescribed limits
•Specifically, agreed cost allowances or budgets
•Then collecting cost data and comparing it to the
corresponding allowances
•And taking appropriate management action
•To contain the final results
05/19/12 8
9. – How would you define PCM?
– Project Cost Management may be defined as
• The process of placing responsibility on the
• project's designers and implementers
• To perform within agreed budget limits
• Either under contract
• Or, through verbal commitment
• The collecting of actual cost data in a suitable
• format
• Comparing that to corresponding budget data
• And taking corrective action as necessary
• Throughout, and as appropriate to, the project life
span
05/19/12 9
10. – What does PCM encompass?
• As with time management
• You have to carefully manage what you do
with the money available
• PCM is another vital function of project
management that includes
• Resource planning
• Cost estimating
• Cost budgeting
• Cost control
• Change control
05/19/12 10
11. – Is it that simple?
No, it certainly is not!
• Two simple but essential principles must
be clearly understood:
1. There must always be a basis for
comparison
• 2. Only future costs can be controlled
•• Therefore, PCM involves
• Careful project planning
• Especially a WBS extended to the activity level
• Estimating the costs of the planned resources
• Converting that estimate to a viable control budget
• Monitoring expenditures as work proceeds, and
• Modifying the approach if the findings are not satisfactory
05/19/12 11
12. – That sounds easy? - 1
• Not really. There are a number of
• challenges, such as:
• • First and foremost, the problem of managing
Project scope
– • A lack of understanding generally that
estimates are no better than just best
available assessments
• And only as good as the data they are based
on an unrealistic expectation of accuracy
• Hence an estimate should be expressed as
arange, not as a single number!
05/19/12 12
13. – That sounds easy? - 2
• More challenges . . .
• The nature of PCM changes with the project
life span
• As we'll explain later
• The historical view of accounting
• Which is not the primary focus of PCM
• The difficulty of getting timely cost
information out of the normal accounting
process
• The necessary data support facilities for
effective PCM are not available within the
organization
05/19/12 13
14. – That sounds easy? - 3
• Still more challenges . . .
•• The difficulty of getting people to peer into the
future, or commit themselves
• During progress of the actual work they feel
they have more important things to do like
getting the work done!
• Some people think you can control costs
simply by turning off the money taps
• There is a tendency to ignore risks, and
• The result of "political interference" to get a
project approved
05/19/12 14
15. – Why bother with cost management?
• The fact is, cost management
is essential if you want to
• Keep people on their toes
• Highlight misuse or wastage of
resources
• Track budget change approvals
• Finish a project within approved
budgets
• Avoid unwelcome surprises,
for your corporate or financial sponsor!
05/19/12 15
16. – Why is PCM so important?
• PCM has a high profile in project management
because
• management is a way of life in all
organizations
• Financially successful organizations depend on strict
financial control and the corporate accounting to
support it
• They are comfortable with the idea of budgeting and
expenditure
• Most people understand the consequences of the
money running out
• Cost is seen as a major metric of successful project
management
05/19/12 16
17. – The most significant aspect of PCM
• From a project perspective, it is important to
understand that
• Cost, or rather money, is simply the common
denominator, or metric, for bringing together
disparate types of resources
• I.e. accounting for use of labor, materials,
• equipment
• For management and control purposes
• However, like time, money itself should not be
considered as a resource υnlike in corporate
financial management ωhere money is the central
purpose and is treated like a commodity
05/19/12 17
18. .
The Project Cost Management processes
include the following:
Cost Estimating
Developing an approximation of the costs of the resources needed
to complete project activities.
Cost budgeting
Aggregating the estimated costs of individual schedule activities or work
packages to establish a total cost baseline for measuring project
performance
Cost Control
Influencing the factors that create changes to the cost baseline
05/19/12 18
19. 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
Today
Actual
Costs (AC) Planned
Value (PV) Is this project
Cumulative over/under
Value budget?
Earned Is it ahead
Value (EV) of/behind
schedule?
Time
05/19/12 19
20. What Do We Want to Know by
Managing Cost?
through answering three questions,
How did we perform ?
How much we differ from plan?
What is the implication for future!
05/19/12 20
21. 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?
05/19/12 21
22. How Do We Manage Cost?
Three processes
Cost Estimating
Cost Budgeting
Cost Control
Cost Cost Cost
Budgeting Control
Estimating
05/19/12 22
23. Cost Estimating
Enterprise Inputs Tools & Techniques
Environmental
Factors Analogous estimating Outputs
Organizational Determine resource cost Activity Cost
Process Assets Estimates
rates
Project Activity
Scope Bottom up estimating Cost
Statement Parametric estimating Estimates
Work Supporting
Breakdown Project management Detail
Structure software
Requested
WBS Vendor bid analysis
Changes
Dictionary Reserve analysis
Project Cost
Management Cost of quality Manageme
Plan nt Plan
•Schedule Mgmt Updates
Pln
•Staffing Mgmt
Pln Cost Cost Cost
•Risk Register Estimating Budgeting Control
05/19/12 23
24. Work Breakdown structure
Company owners and project managers use the Work Breakdown Structure
(WBS) to make complex projects more manageable. The
WBS is designed to help break down a project into manageable chunks that can
be effectively estimated and supervised.
Some widely used reasons for creating a WBS include:
• Assists with accurate project organization
• Helps with assigning responsibilities
• Shows the control points and project milestones
• Allows for more accurate estimation of cost, risk
and time
• Helps explain the project scope to stakeholders
05/19/12 24
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
05/19/12 27
28. 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]
05/19/12 28
29. ANALOGOUS COSTING
Analogous cost estimating means using the actual cost of previous, similar
projects as the basis for estimating the cost of the current project. Analogous
cost estimating is frequently used to estimate costs when there is a limited
amount of detailed information about the project (e.g., in the early phases).
Analogous cost estimating uses expert judgment
PARAMETRIC COSTING
Parametric estimating is a technique that uses a statistical relationship between
historical data and other to calculate a cost estimate for a schedule activity resource.
This technique can produce higher levels of accuracy depending upon the
sophistication, as well as the underlying resource quantity and cost data built into
the model
BOTTOM-UP COSTING
This technique involves estimating the cost of individual work packages or individual
schedule activities with the lowest level of detail. This detailed cost is then
summarized or “rolled up” to higher levels for reporting and tracking purposes. The
cost and accuracy of bottom-up cost estimating is typically motivated by the size and
complexity of the individual schedule activity or work package. Generally, activities
with associated effort increase the accuracy of the schedule activity cost estimate
05/19/12 29
30. Determine Resource Cost Rate
The person determining the rates or the group preparing the
estimates must know the unit cost rates, such as staff cost
per hour and bulk material cost per cubic yard, for each
resource to estimate schedule activity costs. Gathering
quotes is one 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.
Reserve Analysis
reserves are estimated costs to be used at the discretion of
the project manager to deal with anticipated, but not
certain, events. These events are “known unknowns” and
are part of the project scope and cost baselines
05/19/12 30
31. Assigning resources
Availability
Skills
More experienced people
Less experienced people
Desire
Similar tasks to one person to use learning curve
Assign critical tasks to most reliable people
Tasks that need interaction or are similar
Same person
Two who communicate
Personality and team communication does
matter
and again, Availability
05/19/12 31
33. Resource leveling - possible rescheduling
Gantt with Resource Histogram
Automatic resource leveling: use only as
‘suggestion’Manual resource leveling: fast vs good vs
cheap
05/19/12 33
34. Costed WBS
Use Software to roll costs up the WBS
ID Tas k Nam e A ccount F ix e d C o s t T o ta l C o s t Paym e nt
36 F in a l S u b m is s io n $ 0 .0 0 $ 3 3 ,0 0 0 .0 0 $ 0 .0 0
37 F in a l D e s ig n W o r k C14 $ 5 ,0 0 0 .0 0 $ 2 5 ,0 0 0 .0 0 $ 0 .0 0
38 F in a l P la n C14 $ 0 .0 0 $ 8 ,0 0 0 .0 0 $ 0 .0 0
39 T B S u b m is s io n $ 0 .0 0 $ 0 .0 0 $ 0 .0 0
40 EPA $ 0 .0 0 $ 0 .0 0 $ 4 0 ,0 0 0 .0 0
41 S o ftw a r e (S u b c o n tr a c t 5 0 -B ) $ 0 .0 0 $ 1 3 3 ,0 0 0 .0 0 $ 0 .0 0
42 S W D e s ig n $ 1 2 ,0 0 0 .0 0 $ 6 2 ,0 0 0 .0 0 $ 0 .0 0
43 D o P r e lim S W d e s ig n S21 $ 0 .0 0 $ 2 0 ,0 0 0 .0 0 $ 0 .0 0
44 PDR $ 0 .0 0 $ 0 .0 0 $ 0 .0 0
45 D o F in a l S W d e s ig n S22 $ 0 .0 0 $ 3 0 ,0 0 0 .0 0 $ 0 .0 0
46 CDR $ 0 .0 0 $ 0 .0 0 $ 7 0 ,0 0 0 .0 0
47 S W C o n s t r u c t io n $ 1 2 ,0 0 0 .0 0 $ 7 1 ,0 0 0 .0 0 $ 0 .0 0
48 Code CSC A S31 $ 0 .0 0 $ 6 ,0 0 0 .0 0 $ 0 .0 0
49 Code CSC B S31 $ 0 .0 0 $ 8 ,0 0 0 .0 0 $ 0 .0 0
50 In t e g r a t e & T s t C S C I 1 S32 $ 0 .0 0 $ 2 0 ,0 0 0 .0 0 $ 0 .0 0
05/19/12 34
35. Cost Ramp-Up
Use Software to report cash
flow1 9 9 7 19 97 1998 1 998
Q3 Q3 Q 4Q 4 Q1 Q 2Q 2 Q3 Q3 Q4 Q 4 Q1 Q1
$ 4 0 0 ,0 0$ 40 0. 0 0, 0 0 0 . 0 0
$ 3 0 0 ,0 0$ 30 0. 0 0, 0 0 0 . 0 0
$ 2 0 0 ,0 0$ 20 0. 0 0, 0 0 0 . 0 0
$ 1 0 0 ,0 0$ 10 0. 0 0, 0 0 0 . 0 0
C u m u l a tCivu em uC lao t siv t e: C o $s 5t : 3 ,9$ 25 03 ., 90 20 0 . 0 0 $ 1 2$ 71 ,2 17 6, 10 6. 0 .00 0 $ $22 77 44 ,33 6 00 . .0 00 0
, $ 3$ 331 3, 41 4, 40 40 00 .0 0 $ 3 4 9$ , 39 42 09 . ,9 0 2 0 . 0 $03 6 8 , 4 $0 30 6. 0 80 , 4 0 0$ .0 7 06 , 5 0 0 $. 03 07 6 , 5$ 03 07 .6 0, 50 0 0 . 0 0$ 3 7 6 ,5 0 0 . 0 0
. 0 3
F i lt e Fr ei l tde r re ed s roe us ro cu er cs e s T To ot taa ll::
C P MC P M T To ot taa ll::
05/19/12 35
36. Cost - Sanity checks
Cost Estimate Error Range – same as Time Estimate
+75% 25
10
0
-8
-25% -10
Indicative Budget Budget
PPA EPA EPA
Init Plan Final Plan Final Plan
PPA - Preliminary Project Approval
EPA - Effective
PDR - Preliminary Design Review
05/19/12 36
37. How Do We Manage Cost?
• Three processes
Cost Estimating
Cost Budgeting
Cost Control
Cost Cost Cost
Estimatin Budgeting Control
g
05/19/12 37
39. Essential definitions
Enterprise Environmental factors-refer to both internal and external factors
that surround or influence a project’s success. These factors may come
from any or all of the enterprises involved in the project. Enterprise
environmental factors may enhance or constrain project management
options and may have a positive or negative influence on the outcome.
They are considered as inputs to most planning processes
Organisational process Assets- are any or all process related assets, from any
or all of the organizations involved in the project that can be used to influence
the project’s success.” Examples include: plans, procedures, lessons learned,
historical information, schedules, risk data and earned value data. Organizational
Process Assets fall into two broad categories—Processes and Procedures, and the
Corporate Knowledge Base.
WBS Dictionary-The WBS dictionary includes entries for each WBS
component that briefly defines the scope or statement of the work,
defines deliverables, contains a list of associated activities, and
provides a list of recognized milestones to gage progress
Approved change requests-refers to a change request that has been submitted
by the requestors, has been reviewed by the appropriate parties through use of
the integrated change control process, and has been granted authorization to be
take place
05/19/12 39
40. Essential definitions
Risk Register-The risk register or risk log becomes essential as it records
identified risks, their severity, and the actions steps to be taken. It
can be a simple document, spreadsheet, or a database system, but
the most effective format is a table. A table presents a great deal of
information in just a few pages
Cost Baseline-ultimately, project management includes a variety of
responsibilities within one’s team in order to achieve maximum
results for their employer. In regards to money and remaining in
business, providing a budget that is adjusted to time is considered a
cost baseline.
Performance reports- is filled out by the project manager and submitted
on a regular basis to the sponsor, project portfolio management
group, Project Management Office or other project oversight person
or group
Earned Value Analysis-report shows specific mathematical metrics that
are designed to reflect the health of the project by integrating
scope, schedule, and cost information. Information can be reported
for the current reporting period and on a cumulative basis
05/19/12 40
41. Essential Definitions
Resource Calendar-Keeping track of schedules and time
management is one of the most fundamentally important tasks that
are the responsibility of the project management team and or the
project management team leader. One of the best ways to
accomplish this feat is through the careful and well orchestrated
use of calendars to keep track of the multitude of project related
events, occurrences, and dates that will take place during the
project’s life cycle.
Enterprise environmental factors
– Market condition
– Published commercial information
Cost performance baseline
– Authorized time‐phased Budget at Completion
(BAC) used to measure, monitor and control
overall cost performance (S shape curve)
05/19/12 41
42. Cost Budgeting
• 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
05/19/12 42
43. Cost Aggregation
Schedule activity 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 accounts, and
ultimately for the entire project. Reserve analysis establishes contingency reserves,
such as the management contingency reserve, that are allowances for unplanned,
but potentially required, changes. Such changes may result from risks identified in
the risk register
Reserve Analysis
Management contingency reserves are budgets reserved for unplanned, but
potentially required, changes to project scope and cost. These are “unknown
unknowns,” and the project manager must obtain approval before obligating or
spending this reserve. Management contingency reserves are not a part of the
project cost baseline, but are included in the budget for the project. They are not
distributed as budget and, therefore, are not a part of the earned value calculations
Parametric estimating
).
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).
05/19/12 43
44. COST TYPES
Sunk Costs: A historical or expended cost. Since the cost has been expended,
we no longer have control over the cost. Sunk costs are not included when
considering alternative courses of action.
Costs: Nonrecurring costs that do not change based on the number of units,
like expenses related to equipment required to complete a project.
Variable Costs: Costs that rise directly with the size of the project, like
expenses related to consumable materials used to accomplish the project.
Indirect Costs: Costs that are part of the overall organization’s cost of doing
business and are shared among all the current projects. These include salaries of
corporate executives, administrative expenses, any cost that would be considered
part of overhead.
Opportunity Costs: The cost of choosing one 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 with the project, salary of the project staff, expenses
associated with subcontractors.
05/19/12 44
45. Cost Types
Direct Costs
Related “Directly” to the project
ex. Labor hours, material, equipment, food, travel
Indirect Costs
Overhead used for more than one project
ex. Building rent, taxes, janitorial services
05/19/12 45
46. Cost Types
A cost by any other name, really isn’t the
same!
Variable Cost – Changes with volume
Fixed Cost – Stays the same, regardless of volume
TC = VC+FC
COST vs VOLUME
05/19/12 46
47. Cost Types
Project Costs
Are incurred while the project is being fulfilled.
Life Cycle Costs
includes the costs after project completion.
There may be temptation to lower project costs at the
expense of long term costs. Life Cycle Costing
gives the PM a way to consider costs outside
of the scope of project fulfillment
05/19/12 47
48. Important Concepts
Sunk Costs
Forget ‘em, they’re gone
Working Capital
- Current Assets (Cash, Inventories, Accounts
Receivable)
- Liabilities (Notes, AP, Accruals)
05/19/12 48
49. Cost and Project Selection
Present Value
Is $10,000 in your pocket now worth more than
the $10,000 in your pocket one year from now?
Yes! You can use the money now to make more money.
The 10,000 in a year from now should be “discounted” to
the present, since it’s not worth as much.
05/19/12 49
50. Present Value of Your PMP
Consulting Gig
Time
Income Present Value
1 10,000 10,000
2 10,000 9,090
3 10,000 8,264
4 10,000 7,513
5 10,000 6,830
TOTAL 50,000 41,697
05/19/12 50
51. Internal Rate of Return
What is the return on the money
invested?
Expressed as percentage
Great for comparing between two projects of different
value
Project A has an IRR of 21% and Project B
has an IRR of 14%. Which would I choose?
05/19/12 51
52. Payback Period
How long until we get the money back?
“Quick and Dirty” method for project selection
Does not take into account the Time Value of Money
Your Project costs $50,000, and the cash flow it
will bring is $11,000 a year.
The Payback Period is. . . 5 years
Discount rate/Interest Rate....10%
05/19/12 52
53. Payback Period
Cumulative
Inflow
(with
Cumulative discount@10%)
Inflow Resulting Value of Note:the two (with
Return (without cash flow(end of
discount year, with discount) or without discount
do not differ too
@10%) much in duration
11,000 11,000 10,891 10,891
11,000 22,000 10,783 21,674
11,000 33,000 10,676 32,347
11,000 44,000 10,571 42,914
11,000 55,000 10,476 53,394
Break Even at The BE Point is With Discount Pay- Back Pay-Back Period is
50,000 4yrs 7mths is Different 4yrs 8 mths.
05/19/12 53
54. Net Present Value
NPV, like Present Value, discounts future
cash flows to the present
PV of Revenue – PV of Costs
05/19/12 54
55. Net Present Value: Your PMP Gig
Time Revenue Present Costs PV of Costs NPV
Value
0 10,000 10,000 12,000 12,000 -2,000
1 10,000 9,090 2,000 1,818 7,272
2 10,000 8,264 2,000 1,653 6,611
3 10,000 7,513 2,000 1,502 6,011
4 10,000 6,830 2,000 1,366 5.464
Total 50,000 41,697 20,000 18,339 23,358
05/19/12 55
56. Payback Period
How long until we get the money back?
“Quick and Dirty” method for project selection
Does not take into account the Time Value of Money
Your Project costs $50,000, and the cash
flow it will bring is $11,000 a year.
The Payback Period is. . . 5 years
05/19/12 56
57. Benefit Cost Ratio
Compares the revenues to the costs
Revenue in this is the same as “payback”
1 is the magic number where costs = revenue
Less than 1, costs are greater than benefits
Greater than 1, and the benefits are greater than costs.
If Project A has a BCR of 2.2 and Project B
has a BCR of 1.2, pick A.
05/19/12 57
58. How Do We Manage Cost?
Three processes
Cost Estimating
Cost Budgeting
Cost Control
Cost Cost Cost
Estimating Budgeting Control
05/19/12 58
59. Cost Control
Inputs Tools & Techniques Outputs
Cost Baseline Cost Estimate
Cost change control system Updates
Project Funding Performance measurement Cost Baseline
Requirements analysis Updates
Forecasting Performance
Performance Measurements
Reports Project performance reviews
Forecasted
Work Project management Completion
Performance software Requested
Information Variance management Changes
Approved Recommende
Change d Corrective
Requests Actions
Project
Management Organizatio
Plan Cost Cost Cost nal Process
Estimating Budgeting Control Assets
Updates
Project
Manageme
nt Plan
Updates
05/19/12 59
60. 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
05/19/12 60
61. 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
05/19/12 61
62. The earned value Management involves developing these key
values for each schedule activity, work package, or control
account:
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
05/19/12 62
63. Earned Variance at
Value
Completion
(VAC)
Graph Target
Cost &
Schedule
Planned
Schedule
Value (PV) Variance
(Time)
Earned
Value (EV)
05/19/12 63
64. Earned Value Formulas
NAME FORMULA NOTES
Cost Variance (CV) EV-AC Negative = Over budget
Positive = Under budget
Schedule Variance EV-PV Negative = Behind
(SV) Schedule
Positive = Ahead of
Schedule
Cost Performance EV/AC How much are we
Index (CPI) getting for every dollar
we spend?
Schedule Perform EV/PV Progress as % against
Index (SPI) plan
Estimate to Complete EAC-AC How much more do we
(ETC) have to spend?
Variance at BAC-EAC At the end of the day,
Completion (VAC) how close will we be to
plan?
Estimate at See the following
Completion (EAC) page
05/19/12 64
65. Earned Value Formulas (Cont’d)
NAME FORMULA NOTES
Estimate at
Complrtion (EAC)
Use if no variances from
BAC/CPI BAC have occurred
Use when original
estimate
AC+ETC was bad. Actuals + New
estimate
Use when current
AC+BAC variances are not
expected to be there in
-EV the future
Use when current
AC+(BAC variances are expected to
continue
-EV)/CPI
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66. Building A Farm Hut Exercise
• You have a project to build a new farm hut
(Barn). The specs for building the hut are to
construct 4 sides and then an angled roof.
• Each side of the hut is to take one day to build
as is the roof. The budgeted amount is $2,000
per side and $2000 applied to the roof cost.
• The sides are to be completed one after the
other. Today is the end of day four.
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67. FORECASTING
Forecasting includes making estimates or predictions of conditions in the project's future
based on information and knowledge available at the time of the forecast.( Forecasts are
generated, updated, and reissued based on work performance information provided as
the project is executed and progressed).
BAC is equal to the total PV at completion for a schedule activity, work package,
control account, or other WBS component. Formula: BAC = total cumulative PV at
completion.
ETC is the estimate for completing the remaining work for a schedule activity, work
package, or control account.
ETC based on new estimate. ETC equals the revised estimate for the work
remaining, as determined by the performing organization. This more accurate and
comprehensive completion estimate is an independent, non-calculated estimate to
complete for all the work remaining, and considers the performance or production of
the resource(s) to date.
Alternatively, to calculate ETC using earned value data, one of two formulas is
typically used:
ETC based on atypical variances. This approach is most often used when current
variances are seen as atypical and the project management team expectations are
that similar variances will not occur in the future. ETC equals the BAC minus the
cumulative earned value to date (EVC). Formula: ETC = (BAC - EVC)
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68. FORECASTING
ETC based on typical variances. This approach is most often used when current variances
are seen as typical of future variances. ETC equals the BAC minus the cumulative EVC (the
remaining PV) divided by the cumulative cost performance index (CPIC). Formula: ETC = (BAC
- EVC) / CPIC
EAC is the projected or anticipated total final value for a schedule activity, WBS component, or
project when the defined work of the project is completed. One EAC forecasting technique is
based upon the performing organization providing an estimate at completion:
EAC using a new estimate. EAC equals the actual costs to date (ACC) plus a new ETC that is
provided by the performing organization. This approach is most often used when past
performance shows that the original estimating assumptions were fundamentally flawed or that
they are no longer relevant due to a change in conditions. Formula: EAC = ACC + ETC
The two most common forecasting techniques for calculating EAC using earned value data are
some variation of:
EAC using remaining budget. EAC equals ACC plus the budget required to complete the
remaining work, which is the budget at completion (BAC) minus the earned value (EV). This
approach is most often used when current variances are seen as atypical and the project
management team expectations are that similar variances will not occur in the future. Formula:
EAC = ACC + BAC - EV
EAC using CPIC. EAC equals actual costs to date (ACC) plus the budget required to complete
the remaining project work, which is the BAC minus the EV, modified by a performance factor
(often the CPIC). This approach is most often used when current variances are seen as typical
of future variances. Formula: EAC = ACC + ((BAC - EV) / CPIC)
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69. 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
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70. Terms to Remember
• Present Value Working Capital
• Net Present Value (NPV) Straight Line Depreciation
• Internal Rate of Return (IRR) Accelerated Depreciation
• Payback Period Double Declining Balance
• Benefit Cost Ratio = BCR>1, Sum of Years Digits
Payback is greater than the Value Analysis (Value
cost Engineering)
• Opportunity Cost
• Sunk Cost
You won’t be calculating most of these numbers on the test,
just remember the concepts for general questions
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71. Questions
Q1-project cost management includes all the following functions,
except;
a. resource planning
b. cost estimating
c. resource leveling
d. cost budgeting
d. cost control
Q2-The output from resource planning includes;
a. job descriptions
b. Salary descriptions
c. The types of resources required
d. All of the above
e.
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72. Questions
Q3- Cost estimates may be expressed in;
a. labour
b. materials
c. supplies
d. inflation allowances
e. none of the above
Q4- resource planning must include consideration of the use of;
a. contractors, equipment, materials
b. people, computers, equipment
c. people, equipment, materials
d. contractors, computers, raw materials
E. none of the above.
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73. Questions
Q5- In the erarned value system, cost variance is computed as;
a. BCWP less BCWS
b. BCWP less ACWP
c. ACWP less BCWP
d. ACWP less BCWS
e. BCWS less BCWP
Q6- Earned value is;
a. percent complete
b. budgeted cost of work performed
c. completed work value
d. all of the above
e. b and c only
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74. Questions
Q7- if BCWS=100, BCWP=98, and ACWP=104, the project is,
a. ahead of schedule
b. headed for a cost overrun
c. doing the business
d. a and b only
e. a and c only
Q8- inputs to resource planning are;
a. the WBS
b. the scope statement
c. a resource pool description
d. organisational policies
e. all of the above
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75. Questions
Q9- Which of the following choices would indicate that your project was 10
percent under budget?
a. BCWS=100, BCWP=110
b. ACWP=100, BCWP=110
c. BCWS=100, ACWP=110
d. ACWP=110, BCWP=100
e. BCWP=100, BCWS=110
Q10- Parametric cost estimating involves;
a. using the WBS as the basis of estimating
b. defining the parameters of the project life cycle
c. calculating individual cost estimates for each work package
d. using rates and factors based on historical experience to estimate costs
e. b and c only
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77. EVA Question
Given a lawn to be cleaned up within four days at an estimated budget
Of Rm2,000, and today after three days the status of the project being;
EV=Rm1250, AC-Rm1750 with a daily planned expenditure=Rm500,
calculate the following:
PV EV CV
BAC CV CPI
SV SPI VAC
(BACEAC) EAC(EAC/CPI) ETC(EAC-AC)
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78. Answers to Questions (Cont’d)
What is: Calculation: Answer: Interpretation of Answer:
PV $500+$500+$500 $1,500 We should have completed $1500
We actually completed $1,250
EV $500+$500+$250 $1,250
worth of work
AC $500+$1000+$250 $1,750 We have actually spent $1,750
BAC $500+$500+$500+$500 $2,000 Our project budget is $2000
CV $1,250 - $1,750 -$500 We are over budget by $500
We are only getting $0.71 out of
CPI $1,250/$1,750 0.714 every dollar that we are spending
on the project
SV $1,250 - $1,500 -$250 We are behind schedule
We are progressing at 83% of the
SPI $1,250/$1,500 0.833
planned rate
We currently estimate the project
EAC $2,000/0.714 $2,801
will cost $2,801
We need to spend $1,051 to finish
ETC $2,801-$1,750 $1,051
the project
We currently expect to be $801
VAC $2,000 - $2,801 -$801 over budget when the project is
completed
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79. Big Dig
Started construction on 1991 and planned
completion by 1997 (6 years), it was to cost $3
Billion, the project included 6 highways
($0.5 Billion per highway/year)
At the end of the first year, 1/2 highway was
completed and the cost was $2 Billion.
Do the EV analysis
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80. Big Dig: The Numbers
EV = Earned Value = $0.25 Billion ($0.5/2)
PV = Planned Value = $0.5 Billion
AC = Actual Cost = $2 Billion
BAC = Budget At Completion = $3 Billion
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81. Big Dig: Performance
CV = EV - AC = $0.25 - $2 = - $1.75 Billion
Over Budget by $1.75 Billion
SV = EV - PV = $0.25 - $0.5 = - $0.25 Billion
Behind of schedule
CPI =EV / AC = $0.25 / $2 = 0.12
Getting 0.12 cents out of every dollar budgeted
SPI = EV / PV = $0.25 / $0.5 = 0.50
50% of progress planned
EAC = BAC / CPI = $3 / 0.50 = $ 6 Billion
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82. Big Dig: Performance
CV = EV - AC = $0.25 - $2 = - $1.75 Billion
Over Budget by $1.75 Billion
SV = EV - PV = $0.25 - $0.5 = - $0.25 Billion
Behind of schedule
CPI =EV / AC = $0.25 / $2 = 0.12
Getting 0.12 cents out of every dollar budgeted
SPI = EV / PV = $0.25 / $0.5 = 0.50
50% of progress planned
EAC = BAC / CPI = $3 / 0.50 = $ 6 Billion
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83. Big Dig
Megabina Sdn Bhd Started construction of sky-
bridges in 2001 and planned completion by 2008
(8 years).They were to cost $12 Billion, the
project included 8 sky-bridges ($1.5 Billion per
bridge/year)
At the end of the year 4 three were completed
and the cost was $2.5Billion.
Do the EV analysis
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84. Big Dig: The Numbers
EV = Earned Value = $3.5 Billion($1.5m*3)
PV = Planned Value = $6.0 Billion($1.5*4)
AC = Actual Cost = $2.5 Billion
BAC = Budget At Completion = $12 Billion
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85. Big Dig: Performance
CV = EV - AC = $3.5 - $2.5 = $1.00 Billion
Under Budget by $1.00 Billion
SV = EV - PV = $3.5 - $6.5 = - $3.00 Billion
Behind of schedule
CPI =EV / AC = $3.5 / $2.5 = 1.4
Getting 1.14 cents out of every dollar budgeted
SPI = EV / PV = $3.5 / $6.5 = 0.50
50% of progress planned
EAC = BAC / CPI = $12 / 0.50 = $ 24 Billion
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86. Tools and Techniques
• Performance reviews
– Compare cost performance over time, schedule
activities or work packages overrunning and under
running the budget, and the estimated funds needed
to complete work in progress
– In EVM:
• Variance analysis: compares actual project (cost or schedule)
performance to planned or expected performance
• Trend analysis: examines project performance over time to
determine if performance is improving or deteriorating.
Graphical comparison of BAC versus EAC and completion
dates
• Earned value performance: compares the baseline plan to
actual schedule and cost performance
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87. Tools and Techniques
• Variance analysis
– Cost performance measurements (CV, CPI) are used to
assess the magnitude of variation to the original cost
baseline
– Cause and degree of variance WRT the cost
performance baseline? ‐‐>corrective/preventive
action?
– High acceptable variance range at start, lower as the
project gets closer to complete
• Project Management software
– Monitoring PV, EV, and AC
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88. Outputs
• Work performance measurements
– Calculated CV, SV, CPI, and SPI values for WBS components, work packages
and control accounts are documented and communicated to stakeholders
• Budget forecasts
– Calculated EAC value or bottom‐up EAC value is documented and
communicated to stakeholders
• Organizational Process Assets updates
– Cause of variance
– Corrective actions chosen and the reasons
– Other types of lessons learned from project cost control
• Change requests (through the Perform Integrated Change Control Process)
• Project management plan updates
– Cost performance baseline (scope, activity resources, cost estimates.
Sometimes new cost baseline should be prepared as cost variance is severe)
– Cost management plan
• Project document plan
– Cost estimates
– Basis of estimates
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