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Project Cost Management

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Abstract

Cost control is the part of project management such that cost management processes involved in planning, estimating, budgeting, and controlling costs so that the budget can be completed within the approved budget.
Project Cost
Management
Eda Buchner
Project Cost Management
The processes involved in planning, estimating, budgeting,
and controlling costs so that the budget can be completed
within the approved budget”
Cost Management
Part of triple constraint, can’t manage one without
the others (scope, time, and quality)
Plots of cost and scope against plan can help spot
problems early
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?
Cost Management Key Terms
PV - Planned Value, estimated value of the planned work
EV Earned Value, estimated value of work done
AC Actual Cost, what you paid
BAC Budget at Completion, the budget for the total job
EAC Estimate at Completion, what is the total job
expected to cost?
ETC Estimate to Complete, forecasted costs to complete
job
VAC Variance at Completion, how much over/under
budget do we expect to be?
Cost Management Process?
Three processes
Estimate Costs
Determine Budget
Control Costs
Estimate
Costs
Determine
Budget Control
Costs
Types of Cost Estimates
Type of Estimate
When Done
Why Done
How Accurate
Rough Order of
Magnitude (ROM)
Very early in the
project life cycle,
often 35 years
before project
completion
Provides rough
ballpark of cost for
selection decisions
25%, +75%
Budgetary
Early, 12 years out
Puts dollars in the
budget plans
10%, +25%
Definitive
Later in the project, <
1 year out
Provides details for
purchases, estimate
actual costs
5%, +10%
Estimate Costs
Enterprise
Environmental
Factors
Organizational
Process Assets
Project Scope
Statement
Analogous estimating
Determine resource cost
rates
Bottom up estimating
Parametric estimating
Project management
software
Vendor bid analysis
Reserve analysis
Cost of quality
Inputs Outputs
Tools & Techniques
Work Breakdown
Structure
WBS Dictionary
Project
Management Plan
Schedule Mgmt Pln
Staffing Mgmt Pln
Risk Register
Activity Cost
Estimates
Activity Cost
Estimates
Supporting Detail
Requested Changes
Cost Management
Plan Updates
Estimate
Costs
Determine
Budget Control
Costs
Estimating Methods
Analogous (Top Down) estimating Managers
use expert judgment or similar project costs
[quick, less accurate]
Bottom-Up estimating People doing work
estimate based on work base suggestion, rolled
up into project estimate [slow, most accurate]
Parametric estimating Use mathematical model
[accuracy varies] Two types:
Regression analysis based on analysis of multiple
data points
Learning Curve The first unit costs more than the
100th, forecasts efficiency gains
Estimating Methods
Vendor Bid Analysis Estimating using bids +
allowances for gaps in bid scope [slow, accuracy
depends on gaps]
Reserve Analysis Adding contingency to each
activity cost estimates as zero duration item [slow,
overstates cost]
Determine Budget
Project Scope Statement Cost aggregation
Reserve analysis
Parametric estimating
Funding limit reconciliation
Inputs
Outputs
Tools & Techniques
Cost Baseline
Project Funding
Requirements
Cost Management
Plan Updates
Requested Changes
Work Breakdown Structure
WBS Dictionary
Activity Cost Estimates
Activity Cost Estimates
Supporting Detail
Project Schedule
Resource Calendars
Contract
Cost Management Plan
Estimate
Costs
Determine
Budget Control
Costs
Example: Project Cost Estimate Overview
Category
Description
Objective
Install a suite of packaged financial applications
software which will enable more timely
information for management decision-making,
easier access to data by the ultimate end user, and
allow for cost savings through productivity
improvements throughout the company.
Scope
The core financial systems will be replaced by
Oracle financial applications. These systems
include:
General Ledger
Fixed Assets
Ops Report [AU: spell out Ops]
Accounts Payable
Accounts Receivable
Project Accounting
Project Management
Assumptions
Oracle's software provides
Minimal customization
No change in procurement systems during
accounts payable implementation
Cost/Benefit Analysis
& Internal Rate of Return (IRR)
BSR was broken down into a three-year cash
outlay without depreciation. Costs are
represented in thousands. Capital and expenses
are combined in this example.
Example: Business Systems Replacement
Project Cash Flow Analysis
FY96
($000)
FY97
($000)
3 Year
Total
($000)
Future Annual
Costs/Savings
($000)
Costs
Oracle/PM Software
(List Price)
500
0
1492
0
60% Discount
(595)
Oracle Credits
0
(397)
Net Cash for Software
500
500
Software Maintenance
90
250
340
250
Hardware & Maintenance
270
270
540
270
Consulting &Training
320
0
525
0
Tax & Acquisition
150
80
230
50
Total Purchased Costs
1330
600
2135
570
Information Services &
Technology (IS&T)
1850
1200
3550
0
Finance/Other Staff
990
580
1770
Total Costs
4170
2380
7455
570
Savings
Mainframe
(101)
(483)
(584)
(597)
Finance/Asset/PM
(160)
(1160)
(1320)
(2320)
IS&T Support/Data Entry
(88)
(384)
(472)
(800)
Interest
0
(25)
(25)
(103)
Total Savings
(349)
(2052)
(2401)
(3820)
Net Cost (Savings)
3821
328
5054
(3250)
8 Year Internal
Rate of Return
Determine Budget
Budgeting is allocating costs to work packages
to establish a cost baseline to measure project
performance
Remember Contingency items are for unplanned
but required changes it is not to cover things
such as:
Price escalation
Scope & Quality Changes
Funding Limit Reconciliation Smoothing out
the project spend to meet management
expectations
Control Costs
Cost Baseline
Project Funding
Requirements
Performance
Reports
Cost change control system
Performance measurement
analysis
Forecasting
Project performance reviews
Project management
software
Variance management
Inputs Outputs
Tools & Techniques
Work Performance
Information
Approved Change
Requests
Project
Management Plan
Cost Estimate
Updates
Cost Baseline
Updates
Performance
Measurements
Forecasted
Completion
Requested Changes
Recommended
Corrective Actions
Organizational
Process Assets
Updates
Project Management
Plan Updates
Estimate
Costs
Determine
Budget Control
Costs
Example: Budget Estimates and Explanations
Budget Category
Estimated Costs
Explanation
Headcount (FTE)
13
Included are 9 programmer/analysts, 2
database analysts, 2 infrastructure
technicians.
Compensation
$1,008,500
Calculated by employee change notices
(ECNs) and assumed a 4% pay increase in
June. Overload support was planned at
$10,000.
Consultant/Purchased
Services
$424,500
Expected consulting needs in support of the
Project Accounting and Cascade
implementation efforts; maintenance
expenses associated with the Hewlett-
Packard (HP) computing platforms;
maintenance expenses associated with the
software purchased in support of the BSR
project.
Travel
$25,000
Incidental travel expenses incurred in
support of the BSR project, most associated
with attendance of user conferences and
off-site training.
Depreciation
$91,000
Included is the per head share of
workstation depreciation, the Cascade HP
platform depreciation, and the depreciation
expense associated with capitalized
software purchases.
Rents/Leases
$98,000
Expenses associated with the Mach1
computing platforms.
Other Supplies
and Expenses
$153,000
Incidental expenses associated with things
such as training, reward and recognition,
long distance phone charges, miscellaneous
office supplies.
Total Costs
$1,800,000
Earned Value
Progress is compared against the
baseline to determine whether
project is ahead of or behind plan
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
Earned
Value
Graph
Variance at
Completion
(VAC)
Target
Cost &
Schedule
Schedule
Variance
(Time)
Planned
Value (PV)
Earned
Value (EV)
Earned Value Formulas
NAME FORMULA NOTES
Cost Variance (CV) EV-AC Negative = Over budget
Positive = Under budget
Schedule Variance
(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 Perform
Index (SPI) EV/PV Progress as % against plan
Estimate to
Complete (ETC) EAC-AC How much more do we have to
spend?
Variance at
Completion (VAC) BAC-EAC At the end of the day, how close will
we be to plan?
Estimate at
Completion (EAC) See following slide
Earned Value Formulas (Cont’d)
NAME FORMULA NOTES
Estimate at
Completion (EAC) BAC/CPI
Use if no variances from
BAC have occurred
AC+ATC Use when original
estimate was bad. Actuals
+ New estimate
AC+BAC-EV Use when current
variances are not expected
to be there in the future
AC+(BAC-EV)/CPI Use when current
variances are expected to
continue
Tricks for Earned Value
EV is always first
Variance = EV minus something
Index = EV divided by something
If the formula relates to cost use AC
If the formula relates to schedule use PV
Interpreting results: negative is bad and positive is good
Interpreting results: greater than one is good, less than
one is bad
PV
AC ETC EAC
BAC
Project
Start Current
Status
Example: . Earned Value Calculations for
One Activity After First Week
Example: Earned Value Calculations for a
One-Year Project After Five Months
Example Figure:Earned Value
Chart for Project After Five Months
... Dr. Qi Anbang (2000) published a book "Total Cost Management of Project", this book gives a brief introduction on the life cycle cost management theory and methods, this is the earliest writings in life cycle cost management [13]. ...
Article
Full-text available
The effective implementation of the project management plays a core roll in avoiding bad project use effect and waste of funds, caused by asset management planning and design errors or equipment selection errors; meanwhile, it can effectively improve the operational efficiency of enterprise assets, lower operating costs and save resources. In June 1974, A. Gordon published a paper “3L Economics Concept” as the starting point, on the “Building and Quantity Surveying”, which is organized by the Royal Institution of Chartered Surveyors. In this paper, a review of domestic and foreign research, from 1974 to 2015, on the total life cycle management progress will be given, and then a comment on it will be established. After detailed investigation and analysis of related materials, we can draw a conclusion: the study of the oil and gas development project lifecycle management is just beginning now. Hence, building the whole life cycle planning index system in line with the characteristics of oil and gas development project is very necessary.
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