COURSE STRUCTURE

1. Introduction to Project Management, understanding

contracts & negotiation principles
5. Risk management

2. Scope management
6. Project execution

3. Schedule management
7. Project change management

4. Cost management
8. Project monitoring and control, role of the PMO &
managing troubled projects

1
PROJECT COST Deepak Hemadri

MANAGEMENT
YOUR ROLE IN FINANCIAL SUCCESS

▪ Responsible for project financial performance ▪ Price project correctly

▪ Keep scope under control and changes ▪ Regularly monitor financial

documented performance
Project Account
▪ Regularly monitor financial performance ▪ Assist in the billing and
Manager Lead collection of monies

Solution Technical

Lead
▪ Design solution to be cost appropriate
for the deal we are working
▪ Determine right level of skills needed
▪ Manage scope

Every project is a small business, and you are the leaders of that business — it is up to you to make money!
PROJECT P&L STRUCTURE

The Price charged to a client based on a contract and associated deliverables (also known as
Project Revenue = Total Contract Value). Also - total $ collected from the client (before sales and other applicable
taxes).

All labor, equipment, and other (software, hardware, travel, etc.) costs directly associated with the
Direct Cost of Project =
delivery and execution of the Project.

Direct Cost Margin (DCM) of Project Revenue – Direct Cost of Project (also Profit = Price – Costs).
=
Project Direct Cost Margin % = (Project Revenue - Direct Cost of Project) / Project Revenue

Costs incurred – generally common/pooled costs incurred and managed centrally (facilities,
Indirect Costs (IC) =
IT, etc.) but allocated to projects on a pre-determined basis for their fair share of costs

Gross Margin (GM) of $ Margin left over after adjusting for Indirect costs
=
Project GM = DCM – IC

Shared Sales and General & Administrative overhead expenses charged on a pre-
SG&A =
determined basis
Margin left after deducting for SG&A Overhead
Operating Income (OI) =
OI = GM – SG&A
PROJECT P&L TARGETS

Targets expressed as % Revenue

Project Revenue 100%

• Cost of all hours/days billed Project by employees, Sub-contractors, etc.

• Costs of all HW and SW purchased and delivered to the customer
(58%-60%)
Direct • Depreciation and amortization (of equipment, SW, etc.)
Costs • Travel, subsistence/allowance, etc. incurred directly for the project
• Shared delivery organization’s pooled costs such as recruiting, bench, etc.
(5%-10%)
• Cost ranges depending on the Region
Direct Cost Margin (DCM) 30% - 35%
• Share of Corporate/Global infrastructure Costs managed centrally and shared by all; % Budget
Indirect Costs (6%)
Revenue typically fixed once a year
Gross Margin ~25%+
• Share Industry Coverage and Offering sales expenses
(5% - 8%)
SG&A • Depends on the Region’s cost structure
• General & Admin (G&A) Overhead: Fixed $ (for the fiscal year) based on % of Budget revenue (5.1%)
Operating Income 12%-15%
REVENUE RECOGNITION IS BASED ON PROJECT TYPE

Time and Material Maintenance

(T&M)
Contracts in which the client
pays for services based on
Definition
days/hours worked at agreed
rates.
Firm Fixed Price (FFP)
Contracts where a fixed
amount is charged for
specific services provided.
Fixed Price projects are
usually tied to deliverables.
Cost Reimbursable
Contracts in which the client
pays for the actual costs of
services provided.
(Support)
Contracts where a fixed
amount is charged for a set
number of resources or
quantity of services provided
over a duration of time.

Deliverables Yes Yes Yes Yes

Management
Reserve or Yes, typically 5 – 20% based Yes, typically 5 – 10% based Yes based on contract SLA’s
Yes based on contract risks
Contingency on project risk on project risk and risks.
Maintained
Revenue is based on project
Based on the actual cost and
Based on achievement of duration.
Based on hours worked times a % of the fee (profit) pool
Revenue progress toward completion — Revenue is spread
client bill rate plus based on the type of cost
Recognition percentage of evenly across the length of
reimbursable ODC expenses. reimbursable contract and
project completed. the project, applying the same
performance.
amount to each period.
ESTIMATING TASK COST
& DURATION
KEY DEFINITIONS

Cost Determining the costs of the resources to

estimating complete project activities

Cost Allocating the approved budget to the individual

budgeting project components so that they can be baselined,
measured, and managed

Cost • Direct
Categories • Indirect
• Fixed
Types of
• Variable
costs
• Semivariable
ESTIMATES

WBS Level Estimate Name(s) Precision and range When to use

An industry standard PMBOK precision and

precision and range range

Top Levels Order of Magnitude, Portfolio, +75%, -25% +100, -50% When only very basic data
conceptual, quickie, feasibility is available or needed
(project selection)

Middle summary Budgetary, Preliminary, +25, -10% When resource materials,

levels design, appropriation expense and overhead
information are available
and the objective is
identified

All levels Definitive, Finalized, expense, +10, -5% +15, -10% When detailed information
grass roots, engineering is available
ESTIMATING TOOLS AND TECHNIQUES
Analogous
• Analogous estimates are made by comparing similarities of future projects
with past experiences. For example
• Imagine your team does database migrations
• You formerly worked on simple databases that were migrated from AIX to
HP-UX, with around 5 TB of data
• Typical work cost is $ 30K
• What considerations should you make to raise, lower, or keep the price the
same if you will have to migrate from Solaris to HP-UX

Parametric modeling Cost Element Per scan cost Cost

Preparation $100
• A mathematical relationship that describes project costs in terms of a known
Scan $150
project characteristic
Remove false positives $50
• Example : $/Scanning an application
Prepare report and submit $50
• Estimating Table Total

Bottom up (also called engineering or detailed)

• The bottom-up estimating method-
• Is the most accurate method
• Allows for integration of activities
• Uses the bottom level of the WBS
• Adds work package estimates to obtain total project cost
PROGRAM EVALUATION AND REVIEW TECHNIQUE - (PERT)
• One of the more significant statistical
approaches used in risk analysis
• An event-oriented network analysis
technique used when task durations have a
high degree of uncertainty
• Applies the critical path method (CPM) to a
weighted average estimate for task
durations
• PERT is useful in estimating costs as well
as schedule

𝑂𝑝𝑡𝑖𝑚𝑖𝑠𝑡𝑖𝑐 + 4 ∗ 𝑀𝑜𝑠𝑡 𝑙𝑖𝑘𝑒𝑙𝑦 + 𝑃𝑒𝑠𝑠𝑖𝑚𝑖𝑠𝑡𝑖𝑐

𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝒕𝒊𝒎𝒆 𝒆 𝒕 =
6

2 𝑑𝑎𝑦𝑠 + 4 ∗ 4 𝑑𝑎𝑦𝑠 + 7 𝑑𝑎𝑦𝑠

𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝒕𝒊𝒎𝒆 𝒆 𝒕 = = 4.17 𝑑𝑎𝑦𝑠
6
HOW TO REVIEW AN ESTIMATE
• Review definition of the system
• Study ground rules, constraints and
assumptions
• Focus on data sources
• Compare estimate and established standards
• Determine whether methodology is
acceptable
• Look for “cost drivers”
• Determine whether estimate is within target
• Consider the triple constraint
• Consider customer expectations
• Estimates must be –
• Based on a set of assumptions and collected
data
• Based on the current approved scope and
project specifications
• Changed when the project scope changes
significantly
• Changed when there are authorized changes in
resources, requirements,….
LEARNING CHECKPOINT

Question 1: Which is the best description for Project Revenue?

A. The amount of profit that a company will make on a project

B. The annual contract value of a project
C. The price charged to a client
D. The amount paid by the client
LEARNING CHECKPOINT

Question 2: Which of the following is the majority of the cost on your

project?

A. Direct Labor Cost

B. Travel, training, and materials
C. Sales and General & Administrative (SG&A) costs
D. All of the above
LEARNING CHECKPOINT

Question 3: Which of the following best defines Direct Labor Costs?

A. The cost of all organization staff working on your project

B. The cost of all labor, equipment, and other costs directly associated with the delivery and
execution of your project
C. The cost of all organization and subcontractor staff working on your project
D. None of the above
PROJECT CONTROL &
FORECASTING
CONTROL AND CONTROL CHART
• Control
• The process of comparing actual performance, analyzing variances, assessing trends
to effect process improvements, evaluating possible alternatives, and recommending
appropriate corrective actions as needed”

• Control chart
• Graphic display of the results of a process over time and against established control
limits, and that has a centerline that assists in deleting a trend of plotted values toward
either control limit”

• Control is –
• Done on a regular basis

• Concerned with specific tasks and performance

• Relatively cheap
SCHEDULE AND COST CONTROL

Schedule Compares planned and actual project progress

control
Determines a strategy for limiting schedule variance

Manages activities to maintain acceptable variance from

schedule variance

Cost Compares work done and actual project costs

control
Determines a strategy for limiting variation from project
cost baseline
Manages activities to maintain cost budget
WHAT IS EARNED VALUE TECHNIQUE (EVT)

An objective assessment of variance

A standard calculation

A consistent measure from project manager to project manager

A measure of actual work accomplished compared to the authorized

budget for that work and the actual cost to do the work
The earned value technique (EVT) is particularly useful for cost control,
resource management, and production
KEY EARNED VALUE TERMINOLOGY

Planned value (PV) Actual cost (C)

• the sum of approved cost • The total cost incurred in
estimates for activities accomplishing work during
scheduled to be performed a given time period
during a given period

Cost variance (CV) Schedule variance (SV)

Earned value (EV) Budget at completion • The difference between the • The difference between the
• The sum of approved cost (BAC) value of the work completed planned scheduled completion
estimates for activities and actual costs of the work of an activity and the amount
• The sum of approved cost completed of work actually completed
completed during a given estimates for all activities in expressed in dollars
period a project

Cost performance index Schedule performance

(CPI)
• Performance on the money
spent; the value of work
completed per each $1 spent
index (SPI)
• Performance on the money
planned; the value of work
completed per each $1
scheduled to be completed
EARNED VALUE TECHNIQUE
EARNED VALUE CALCULATIONS
Budget at Percent Earned Planned Actual Schedule Cost
Task
completion complete Value (EV) value (PV) Cost(AC) Variance Variance
A 4,500 100% 4,500 4,500 4,500 0 0
B 6,400 100% 6,400 6,400 8,500 0 2,100
C 4,400 100% 4,400 4,400 4,000 0 -400
D 6,000 80% 4,800 6,000 7,000 -1,200 2,200
E 8,000 90% 7,200 8,000 6,250 -800 -950
F 3,000 0% 0 1,000 0 -1,000 0
G 5,000 20% 1,000 0 750 1,000 -250
H 7,800 0% 0 0 0 0 0
Total 45,100 63% 28,300 30,300 31,000 -2,000 2,700

Metric Formula Calculation Result

Schedule performance index SPI=EV÷ PV 28,300 ÷ 30,300 = 0.93
Cost performance index CPI = EV ÷ AC 28,300 ÷ 31,000 = 0.91

Metric Formula Calculation Result

Percent complete EV÷ BAC 28,300 ÷ 45,100 = 63%
Percent spent AC ÷ BAC 31,000 ÷ 45,100 69%
COMPLETION ESTIMATES

• Estimate to complete (ETC) – The expected additional costs to complete the project or specific

activities

• Estimate at completion (EAC) – The expected total cost of the completed project or specific

activities
SCHEDULE SLIPS

• Problem indicators

• Early, large and unfavorable schedule variance

• Front-loaded baseline

• Zero variance
• “Too good to be true”

• Slow resource consumption

• “Can’t get there from here”
UNFAVORABLE SCHEDULE PERFORMANCE

Time Now
Prog
Budget
BCWS
$ Resources

(Planned Schedule Slip

Value)

400 Schedule
BCWP
Variance
(Earned
300 Value)

200

100

Time
▲
J F M A M J J A
UNFAVORABLE COST PERFORMANCE
At Complete
Variance
Time Now
Prog
Budget Management Reserve

ACWP
$ Resources

(Actual
Cost)

Cost BCWS
400 Variance (Planned
BCWP Value)
(Earned
300
Value)

200

100

Time
▲
J F M A M J J A
KEY-TAKEAWAYS

✓ Good Financial Management starts at the beginning (Initiate and Plan) and continues throughout the life of the
project
✓ The project manager and the team are the financial foundation

• Know your project revenue and target margins

• Understand the costs that you can control, and control them tightly

• Recognize that small changes can have a big impact on margin and erode it rapidly

✓ Monitor your financials weekly and report monthly

• Always know your budget, actuals, and Estimate at Completion

✓ Watch for signs of Revenue Leakage and take corrective measures quickly

✓ The devil is in the details, look at them! And don’t forget the big picture
LEARNING CHECKPOINT

Question 4: How often should you report your project financials?

A. On a weekly basis
B. On a monthly basis
C. On a quarterly basis or when your manager asks for your financials
D. Only if you have a financial dispute with your client
LEARNING CHECKPOINT

Question 5: Where should your report your project financials?

A. In a project status report
B. In an email to your manager
C. On the client’s project repository (e.g. Sharepoint)
D. In Project Portfolio Management Systems
LEARNING CHECKPOINT

Question 6: Identify 4 signs of Revenue Leakage

• Billing Errors
• Capped Hours
• Delivering above or below our contractual commitments
• Not selecting the most cost-effective resource
• Scope Creep
• Non-billable hours
• Services not being billed
• Billing misunderstandings
• Out of scope work, extra staff time, forgetting to invoice for work
THANK YOU