“Excellence through Knowledge”

Presenter: Dr. Earl S. Green, P.Eng; PMP

Associate Professor – Electro-mechanical Engineering
 “Excellence through Knowledge”

Learning Objectives
 “Excellence through Knowledge”

• ... primarily concerned with the cost of the resources

needed to complete project activities.
• … different stakeholders measure project costs in
different ways and at different times.
• … application of costs to activities to create a budget
(Cost Baseline)
• … managing project spending to the budget
• … forecasting future project spending
 “Excellence through Knowledge”

Because each project is unique, the PM may need to tailor the application of Project
Cost Management processes, not limited to:

• Knowledge management – EEF & OPA support (database) for technical and
financial information?
• Estimating and budgeting – existence of cost estimating and budgeting-related
policies, procedures, and guidelines?
• Earned value management – is EVM used in managing projects?
• Use of agile approach – are agile methodologies used in managing projects? What
is the impact on cost estimating?
• Governance – are there audit and governance policies, procedures, and guidelines?
 “Excellence through Knowledge”

Knowledge Initiating Planning Executing Monitoring & Closing

Area Controlling

7 7.1 7.4
Cost Plan Cost Control Costs
Management

7.2
Estimate Costs

7.3
Determine
Budget
 “Excellence through Knowledge”

Defines how the project costs will be estimated,

budgeted, managed, monitored, and controlled.

Plan Cost Management is the process that establishes

the policies, procedures, and documentation for
planning, managing, expending, and controlling
project costs.
PMBOK® Guide, Sixth Edition, Glossary
 “Excellence through Knowledge”

Inputs Tools & Outputs

Techniques
• Project charter • Expert Judgment • Cost Management
• Project management • Data analysis Plan
plan • Meetings
•Schedule management plan
•Risk management plan
• EEF
• OPA
 “Excellence through Knowledge”

Estimate Costs is the process of developing an approximation

of the monetary resources needed to complete project
activities.
PMBOK® Guide, Sixth Edition, Glossary
 “Excellence through Knowledge”

Purpose of Estimate Costs

Costs for all resources associated with scheduled activities

must be estimated:
– Labour
– Materials
– Equipment and services
– Special categories (inflation, contingency)
 “Excellence through Knowledge”

Inputs Tools & Outputs

Techniques
• Expert Judgment • Cost estimates
• Project management
plan • Analogous Estimating • Basis of estimates
•Cost management plan • Parametric Estimating • Project documents
•Quality management plan • Bottom-up Estimating updates
•Scope baseline • Three-point •Assumption log
• Project documents Estimating •Lessons learned register
•Risk register
•Lessons learned register • Data analysis
•Project schedule •Alternatives analysis
•Resources requirements •Reserve analysis
•Risk register •Cost of quality
• EEF • Project management
• OPA information system
• Decision making
•Voting
 “Excellence through Knowledge”

• Requires detailed WBS and list of project activities

• Requires accurate and realistic design
• Requires historical vendor costs, productivity rates,
and performance data
• Establishes accurate estimate of cost traceable to
activities/elements of work
 “Excellence through Knowledge”

• Determine Budget is the process of aggregating the

estimated costs of individual activities or work packages to
establish an authorized cost baseline.
PMBOK® Guide, Sixth Edition, Glossary

• “This baseline includes all authorized budgets but

excludes management reserves.”
Project Management Institute, A Guide to the Project Management Body of Knowledge (PMBOK ® Guide) – Sixth
Edition, Project Management Institute, Inc., 2017.
 “Excellence through Knowledge”

• Creates the Cost Baseline for the project

• Cost baseline is built from the costs and timeline for
each activity
• Time-phases the project cost estimates with the
schedule to allow the organization to plan cash flows
 “Excellence through Knowledge”

Inputs Tools & Outputs

Techniques
• Project management • Expert judgment • Cost Baseline
plan • Cost aggregation • Project Funding
•Cost management plan
• Data analysis Requirements
•Resource management plan
•Reserve analysis • Project Documents
•Scope baseline
• Project documents • Historical information Updates
review •Cost estimates
•Basis of estimates •Project schedule
•Cost estimates • Funding limit
reconciliation •Risk register
•Project schedule
•Risk register • Financing
• Business documents
•Business case
•Benefits management plan
• Agreements
• EEF
• OPA
“Excellence through Knowledge”
 Cost estimates
are not a budget
until they have
been time-
phased.

Time Phased Work

Packages Assigned
“Excellence through Knowledge”
 “Excellence through Knowledge”

Control Costs is the process of monitoring the status

of the project to update the project budget and
managing changes to the cost baseline.
PMBOK® Guide, Sixth Edition, Glossary
 “Excellence through Knowledge”

• Influencing the factors that create changes to the authorized cost baseline;
• Ensuring that all change requests are acted on in a timely manner;
• Managing the actual changes when and as they occur;
• Ensuring that cost expenditures do not exceed the authorized funding by period, by WBS
component, by activity, and in total for the project;
• Monitoring cost performance to isolate and understand variances from the approved cost
baseline;
• Monitoring work performance against funds expended;
• Preventing unapproved changes from being included in the reported cost or resource usage;
• Informing appropriate stakeholders of all approved changes and associated cost; and
• Bringing expected cost overruns within acceptable limits
 “Excellence through Knowledge”

Inputs Tools & Outputs

Techniques
• Work Performance
• Expert judgment Information
• Project management • Cost Forecasts
plan • Data analysis
•Cost management plan •Earned value analysis • Change Requests
•Cost baseline •Variance analysis • Project Management Plan
•Performance measurement •Trend analysis Updates
baseline •Reserve analysis • Cost management plan
• Project documents • To-complete • Cost baseline
•Lessons learned register performance index • Performance measurement
• Project funding • Project management baseline
requirements information system • Project Documents Updates
• Work performance data • Assumption log
• OPA • Basis of estimates
• Cost estimates
• Lessons learned register
• Risk register
 “Excellence through Knowledge”

Earned value analysis – EVA compares the performance

measurement baseline to the actual schedule and cost
performance.

EVM integrates the scope baseline with the cost & schedule
baselines to form the performance measurement baseline (by
way of the development and monitoring of 3 key dimensions
for each work package and control account:
 “Excellence through Knowledge”

• Planned value (PV) - the authorized budget assigned to scheduled physical

work for an activity or WBS component, not including management
reserve. The PV describes how far along project work is supposed to be at
any point in the project schedule. The total of the PV is sometimes referred
to as the performance measurement baseline (PMB). The total planned
value for the project is also known as Budget at completion (BAC).
• Earned value (EV) - a measure of the budget associated with the
authorized work that has been completed. The EV measured cannot be
greater than the authorized PV budget for a component.
EV = % of work completed x BAC
• Actual cost (AC) - the total cost incurred for the work performed on an
activity to date, or over a given time period. The AC will have no upper
limit - whatever is spent to achieve the EV will be measured.
 “Excellence through Knowledge”

Variance analysis – reviews the differences/variance

between planned and actual performance.

• Cost Variance CV = EV – AC
• Schedule Variance SV = EV – PV
• Variance at Completion VAC = BAC – EAC
 “Excellence through Knowledge”

• Schedule performance index (SPI) - a measure of how efficiently the project

team is accomplishing the work.

SPI = EV/PV
SPI < 1.0 indicates less work was completed than was planned
SPI > 1.0 indicates that more work was completed than was planned

• Cost performance index (CPI) - a measure of how efficiently the project team
is utilizing the resources.

CPI = EV/AC
CPI < 1.0 indicates a cost overrun for work completed
CPI > 1.0 indicates a cost underrun of performance to date
“Excellence through Knowledge”
 “Excellence through Knowledge”

Estimate at Completion (EAC) is

typically based on the actual costs incurred
for works completed, plus an estimate to
complete (ETC) the remaining works.

EAC = AC + Bottom-up ETC.

EAC = AC + (BAC – EV)
EAC = BAC / CPI
EAC = AC + [(BAC – EV) / (CPI × SPI)]
 “Excellence through Knowledge”

To Complete Performance
Index (TCPI)
- a measure of the cost
performance that is required to
be achieved with the remaining
resources in order to meet a
specified management goal.
- expressed as the ratio of the
cost to finish the outstanding
work to the remaining budget.
 “Excellence through Knowledge”

Name Formula Question it Answers

Cost Variance (CV) EV – AC Are we over or under budget?

Cost Performance Index (CPI) EV / AC How efficiently are we using our

resources?

Schedule Variance (SV) EV – PV Are we ahead or behind schedule?

Schedule Performance Index (SPI) EV / PV How efficiently are we using time?

To Complete Performance Index (BAC – EV) / (BAC – AC) How efficiently must we use our
(TCPI) remaining resources?

Estimate at Completion (EAC) BAC / CPI What is the project likely to cost?

Estimate to Completion (ETC) (BAC – EV) / CPI What will the remaining work cost?

Variance at Completion (VAC) BAC – EAC Will we be under or over budget?

 “Excellence through Knowledge”

You have a project to build a new perimeter fence.

– The perimeter fence is four sided.
– Each side is to take 1 day to build.
– Each side is budgeted at $1,000.00.
– The sides are planned to be completed one after the
other (see overleaf).
– Today is the end of day 3.
 “Excellence through Knowledge”

Activity Day 1 Day 2 Day 3 Day 4 Status at End

of Day 3

Side 1 S------F 100% Complete

Spent $1,000

Side 2 S------PF ---F 100% Complete

Spent $1,200

Side 3 PS---S---PF 50% Complete

Spent $600

Side 4 PS------PF Not Yet Started

KEY
PMP® Exam Prep 6th Edition
S Actual Start F Actual Finish
by Rita Mulcahy, p. 244
PS Planned Start PF Planned Finish
 “Excellence through Knowledge”

Calculate:
1. Planned Value (PV)
2. Earned Value (EV)
3. Actual Cost (AC)
4. Budgeted at Completion (BAC)
5. Cost Variance (CV)
6. Cost Performance Index (CPI)
7. Schedule Variance (SV)
8. Schedule Performance Index (SPI)
9. To Complete Performance Index (TCPI)
10. Estimate at Completion (EAC)
11. Estimate to Completion (ETC)
12. Variance at Completion (VAC)
 “Excellence through Knowledge”

Answers:
1. PV $3,000

2. EV $2,500

3. AC $2,800

4. BAC $4,000

5. CV -$300

6. CPI 89.3%
 “Excellence through Knowledge”

• Your project is running well. In the latest earned value report,

you see the CPI = 1.2, the SPI = 0.8, the PV = $600,000, and
the SV = -$120,000. You can’t find the CV in the report, so
you calculate it based on the information given.

• What is the CV?

“Excellence through Knowledge”

Answer:
CV = $80,000
 “Excellence through Knowledge”

You are constructing 6 additional rooms on an

office building. Each of the 6 rooms is identical,
and the projected cost for the project is $100,000
and is expected to take 5 weeks.

At the end of the 2nd week you have spent

$17,500 per room and have finished 2 rooms. You
are ready to begin on the third.
 “Excellence through Knowledge”

Description Value
Budget At Completion
Planned Value
Earned Value
Actual Cost
Cost Variance
Schedule Variance
Cost Performance Index
Schedule Performance Index
Estimate At Completion
Estimate To Completion
Variance At Completion
 “Excellence through Knowledge”
Description
Budget At Completion
Planned Value
Earned Value
Actual Cost
Cost Variance (EV-AC)
Schedule Variance (EV-PV)
Cost Performance Index (EV/AC)
Schedule Performance Index (EV/PV)
Estimate At Completion (BAC/CPI)
Estimate To Completion (EAC-AC)
Variance At Completion (BAC-EAC)
Value
$100,000
2w/5w = 40%*100,000= $40,000.
2r/6r=33.3% *100,000=33,333.33
$17,500*2r = $35,000.
$33,333.33-$35000 = -$1,666.67
$33,333.33-$40,000= -$6,666.67
$33,333.33/$35,000= 0.95
$33,333.33/$40,000 = 0.83
$100,000/0.95 = $105,263.15
105263.15-35000 = $70,263.15
100000 – 105263.15=-$5,263.15
 “Excellence through Knowledge”

1. Is the project ahead of or behind schedule?

2. Is the project going to be completed over or
under budget?
“Excellence through Knowledge”