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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

Today
Actual
Costs (AC) Planned
Cumulative Value (PV)
Value
Is this project
Earned over/under budget?
Value (EV)
Is it ahead of/behind
schedule?
Time
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

Control Costs
Estimat Determine
Budget
e
Costs
 Types of Cost Estimates

Type of Estimate When Done Why Done How Accurate

Rough 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 project
completion
Budgetary Early, 1–2 years out Puts dollars in the –10%, +25%
budget plans
Definitive Later in the project, < Provides details for –5%, +10%
1 year out purchases, estimate
actual costs
 Estimate Costs
Enterprise
Environmental Inputs Tools & Techniques Outputs
Factors
 Analogous estimating
Organizational  Determine resource cost
Process Assets rates Activity Cost
Estimates
Project Scope  Bottom up estimating
Statement  Parametric estimating Activity Cost
Estimates
Work Breakdown  Project management Supporting Detail
Structure software
WBS Dictionary  Vendor bid analysis Requested Changes

 Reserve analysis
Project Cost Management
 Cost of quality
Management Plan Plan Updates
• Schedule Mgmt Pln
• Staffing Mgmt Pln
• Risk Register
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
Tools & Techniques
Outputs
Project Scope Statement Cost aggregation Cost Baseline
Work Breakdown Structure  Reserve analysis
 Parametric estimating Project Funding
WBS Dictionary Requirements
Inputs  Funding limit reconciliation
Activity Cost Estimates
Activity Cost Estimates Cost Management
Supporting Detail Plan Updates

Project Schedule Requested Changes

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

Cost/Benefit Analysis
& Internal Rate of Return (IRR)
 Minimal customization
 No change in procurement systems
during accounts payable implementation
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
FY95 FY96 FY97 3 Year Future Annual
Total Costs/Savings
($000) ($000) ($000) ($000) ($000)
Costs
Oracle/PM Software 992 500 0 1492 0
(List Price)
60% Discount (595) (595)
Oracle Credits (397) 0 (397)
Net Cash for Software 0 500 500
Software Maintenance 0 90 250 340 250
Hardware & Maintenance 0 270 270 540 270
Consulting &Training 205 320 0 525 0
Tax & Acquisition 0 150 80 230 50
Total Purchased Costs 205 1330 600 2135 570
Information Services & 500 1850 1200 3550 0
Technology (IS&T)
Finance/Other Staff 200 990 580 1770
Total Costs 905 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) 905 3821 328 5054 (3250)

8 Year Internal 35%

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
Inputs Tools & Techniques Outputs Cost Estimate
Cost Baseline  Cost change control system Updates

Project Funding  Performance measurement Cost Baseline

Requirements analysis Updates
Performance
 Forecasting
Performance Measurements
Reports  Project performance reviews
Forecasted
Work Performance  Project management Completion
Information software
Requested Changes
 Variance management
Approved Change Recommended
Requests Corrective Actions

Project Organizational
Process Assets
Management Plan
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 $424,500 Expected consulting needs in support of
Services 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 $153,000 Incidental expenses associated with things
and Expenses such as training, reward and recognition,
long distance phone charges,
miscellaneous office supplies.
 Earned Value
Progress is compared against the Planned Value
baseline to determine whether (PV) – Budgeted
Cost
project is ahead of or behind plan Earned Value
Percent complete can be difficult to (EV) – Actual
work completed
measure, some managers use rules Actual Cost (AC)
 50/50 Rule – Assumed 50% – Costs
complete when task started, final incurred
50% at completion Estimate to
Complete (ETC)
 20/80 Rule – 20% at start – What’s Left
 0/100 Rule – No credit until complete Estimate at
Completion
(EAC) – What
final cost will be
Earned Variance at

Value
Completion
(VAC)

Graph Target
Cost &
Schedule

Planned Schedule
Value Varianc
(PV) (Time)

Earned
Value (EV)
Earned Value Formulas

NAME FORMULA NOTES

Cost Variance (CV) EV-AC Negative = Over budget
Positive = Under budget
Schedule Variance EV-PV Negative = Behind Schedule
(SV) Positive = Ahead of Schedule
Cost Performance EV/AC How much are we getting for every
Index (CPI) dollar we spend?
Schedule Perform EV/PV Progress as % against plan
Index (SPI)
Estimate to EAC-AC How much more do we have to
Complete (ETC) spend?
Variance at BAC-EAC At the end of the day, how close will
Completion (VAC) we be to plan?
Estimate at See following slide
Completion (EAC)
 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

Project Current
Start Status BAC
PV
EAC
AC ETC
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

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