PROJECT MANAGEMENT

Unit 2 : PMBOK
“Cost Management”

Week : 06

Prepared by: Prof. Augusto

Choy 1
PROJECT
MANAGEMENT
UNIT 1: PROJECT MANAGEMENT BODY OF KNOWLEDGE
“COST MANAGEMENT”
WEEK: 06

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Prepared by Prof Augusto Choy
UNIT’S LEARNING OUTCOME
•To recognize and understand the structure of the course in
order to develop and learn PM successfully.
•To review and analyze the main concepts related to Project
Management and how to apply them in their profesional
life.

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Prepared by Prof Augusto Choy
 Unit 2 : PROJECT MANAGEMENT BODY OF KNOWLEDGE

COST MANAGEMENT

◦ Reviewing Concepts – Cost Management

◦ Cost Management Process.

◦ Summary

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Prepared by Prof Augusto Choy
 Topics – Cost Management
1. Cost Management
1. Project Cost
2. Cost Management Processes
3. Budget

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Prepared by Prof Augusto Choy
 Cost Management

 Will the Project be

completed within the
approved budget ?

 Cost Management Definition

It includes the processes involved in
estimating, budgeting, and controlling cost
so that the project can be completed within
the approved budget.
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Reviewing Concepts – Cost Management
 What is The Cost?

 What is the Life Cycle Costing?

 Type of Costs
 Direct and Indirect.
 Fixed and Variable.

 ABC Costing
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Reviewing Concepts – Cost Management
 Cost Management Processes

Nª Process Process
Group
01 Plan Cost Management
02 Estimate Costs Planning
03 Determine Budget
Monitoring
04 Control Costs &
Controlling

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Cost Management Processes
Plan Cost Management
 Cost Management Plan

 Specifications for how estimates should be

stated.
 The level accuracy needed for estimates.
 Reports formats to be used.
 Rules for measuring cost performance –
Earned Value Technique.
 Control Thresholds.
 Types of Costs that will be included.

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Plan Cost Management

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Cost – Estimate Costs
• Process of developing an approximation
of the monetary resources needed to
complete project activities.
• Cost Estimates are generally expressed in units of some
currency (dollares, euro, nuevos soles, etc.).
• Estimate Costs process involves:
 Costs of quality and risk efforts.
 Cost of Project Manager’s time
 Cost of project management activities.
 Costs directly associated with the project, and others
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Cost – Estimate Costs
• Accuracy of Estimates
• Estimates made in the early part of the project will be less
accurate than those made later in project.
• Estimates must be in a range and be refined as the project
progress.

Type Estimate Phase Range

Rough Order of - 50% to + 50%
Initiation Phase
Magnitude (ROM)
Budget Planning Phase (early) - 10% to + 25%
- 05% to + 10%
Defintive Planning Phase (later)

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Cost – Estimate Costs
• What data do we need before estimating Cost?
 The Scope Baseline.
 Project Schedule.
 Human Resource Plan.
 Risk Register.
 Project Management Cost.
 Organizational Process Assets (policies, templates,
historical information and Lessons Learned).
 Enterprise Environmental Factors (market conditions,
published commercial information).

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Cost – Estimate Costs
• Techniques
 Analogous Estimating.
 Parametric Estimating.
 Three Points Estimating.
 Bottom-Up Estimating

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 Cost – Estimate Costs
• Advantages and Disadvantages – Analogous Estimating
Advantages Disadvantages
•Quick •Less accurate
•Activities need not be identified •Estimates are prepared with a limited
amount of detailed information and
understanding of the project.

•Less costly to create •Requires considerable experience to do

well.
•Give to PM and Sponsor an idea of the •Extremely difficult for project with
level of management expectations uncertainty

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 Cost – Estimate Costs
Advantages and Disadvantages – Bottom Up
Estimating
Advantages Disadvantages
•More accurate •Takes time and expense to do this
form of estimating.
•Based on a detailed analysis of the •Requires that the project be defined
project. and well understood before work
begins.
•Provides a basis for monitoring and •Requires time to break the project
controlling, performance down into smaller pieces (Scope -
measurement and management. WBS)
•Gains buy-in from the team if they
have defined the estimates (Time –
Estimate Activity Duration)

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Cost – Estimate Costs

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 Cost – Determine
Budget
• Process of aggregating the estimated costs of
individual activities or work package to
establish an authorized Cost Baseline
• Cost Baseline includes all authorized budgets,
but excludes management reserves.
• Project budgets constitute the fund
authorization Project execution. Project cost
performance will be measured against the
authorized budget.

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Cost – Determine Budget
• Cost Aggregation: To create a Budget, activity costs,
including costs for risk contingencies, are rolled up to work
package costs. Work Package costs are then rolled up to
Control Accounts Costs and finally into Project Total. This is
called Cost Aggregation
• Funding Limit Reconciliation: The expenditure of
funds should be reconciled with any funding limits on the
commitment of funds for the project. A variance between
the funding limits and the planned expenditures will
sometimes need the rescheduling of work to level out the
rate of expenditure.

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Cost – Determine Budget
8. Cost Budget $ 1755

7. Management $ 80
Reserves
Cost Aggregation
6. Cost Baseline $ 1675

5. Contingency
Reserves $ 120

4. Project
Estimates $ 1475

3. Control Account CA 1 CA 2
Estimates $ 675 $ 800

2. Work Package
Estimates
WP 1
$ 175
WP 2
$ 500
WP 3
$ 800 …
1. Activity
Estimates
A1
$ 25
A2
$ 25
A3
$ 50
A4
$ 75
A1
$ 20
A2
$ 45 …
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Cost – Determine Budget
Cost Baseline, Expenditures (Cash Flow)
and Funding Requirements

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 Cost – Determine Budget
The ‘S’ Curve
• Curve which
represents the
accumulated costs
(by period of time)
of the Project.

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Cost – Determine Budget

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Cost – Control Costs
• Process of monitoring the status of the project to update the
project budget and managing changes to the Cost Baseline.

• Project Control Costs includes:

 Influencing the factors that create changes to
Cost Baseline.
 Ensuring that cost expenditures do not exceed
the authorized funding, by period and in total
for the project.
 Monitoring cost perfomance periodically.
 It is supported by Earned Value Management.

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Cost – Control Costs
Earned Value Management (EVM)

In the early years of project

management, it became evident that
project managers were having difficulty
determining project status.

Earned value is a management technique that relates resource

planning to schedules and technical performance
requirements. EVM is a systematic process that uses earned
value as the primary tool for integrating cost, schedule,
technical performance management, and risk management.
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Cost – Control Costs
Earned Value Management (EVM)
Without using the EVMS, determining status can be difficult.
Project Reported Status
A total Budget of $ 1.2 Money spent: $ 700,000
millions
A 12 month effort Time elapsed: 6 Months
Produce 10 deliverables Deliverables produced: 4
completed and 2 partial.

• What is the real status of the project?.

• How far along is the project?.
• How to accurately relate cost to
performance

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Cost – Control Costs
Terms - Earned Value Management (EVM)
Acronym Term Interpretation
PV Planned Value As of today, what is the estimated value of
work planned to be done?.
EV Earned Value As of today, what is the estimated value of
work actually accomplished?.
AC Actual Cost As of today, what is the actual cost for the
work accomplished?.
BAC Budget at Completion How much did we BUDGET for the TOTAL
(the budget) Project effort?.
EAC Estimate at Completion What de we currently expect the TOTAL
project to cost (a forecast) ?.
ETC Estimate to Complete From this point on, how much MORE do we
expect it to cost to finish the project
(forecast) ?.

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Cost – Control Costs
Terms – EAC and ETC
Today
BAC
Original PV
Spending
Plan

Actual AC
Spending
Plan
EAC

ETC
ForecastS
pending
Plan

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Cost – Control Costs
Earned Value Graph

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Cost – Control Costs
Formulas and Interpretations
Name Formula Interpretation
Cost •< 0, Over Budget (NOK)
Variance EV - AC •>= 0, Under Budget (OK)
(CV)
Schedule •< 0, Delayed (NOK)
Variance EV - PV •>= 0, Ahead of schedule(OK)
(SV)
Cost •We are getting $ CPI worth of
Performance work
Index (CPI) EV / AC of every $ 1.00 spent.
•>= 1 OK; < 1 NOK
Schedule •We are progressing at SPI % of
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Performance the
Cost – Control Costs
Forecasting
Name Formula Interpretation
•It is used when the original
AC + ETC estimate was fundamentally
flawed.
•It is used if no variances from
BAC have occurred or you will
EAC BAC / CPI continue with the same rate of
Estimate spending.
at
Completio •It is used when current variances
AC + (BAC – are thought to be atypical of the
n EV) future.
AC + •It is used when current variances
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are though to be typical of the
Cost – Control Costs
Forecasting
Name Formula Interpretation

ETC •How much more will the Project

EAC – AC cost?.
Estimate
to •Reestimate the remaining work
Completio Reestimate from the bottom up.
n

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Cost – Control Costs
TCPI – To Complete Performance Index
TCPI is the
calculated projection
of cost performance
that must be achieved
on the remaining
work to meet a
specific management
goal, such as the BAC
or the EAC.
TCPI = (BAC – EV) / Or (BAC – EV) /
(EAC - AC)
(BAC - AC) 34
Cost – Control Costs
Let’s solve some exercises about Earned
Value

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Cost – Control Costs

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Earned Schedule

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Earned Schedule

BCWS = PV
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 Earned Schedule
Let’s see this example
Period (week) EV PV
T=8 1800
T+1 = 9 2000
T+2 = 10 2300 2100

ES = 8 + (2300 – 1800) / (2000 – 1800)

ES = 8 + 500/200 = 8 + 2.5
ES = 10.5
 We are ok because, 0.5 days ahead (10.5 – 10) or
we earned 10.5 days of 10 planned
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Earned Schedule
Schedule Performance Index based on time

>= 1; OK
< 1; NOK

(*) ATE = Actual Time Expended

SPI (t) = 10.5 / 10

SPI (t) = 1.05

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Earned Schedule
Final Duration Forecast
(Independent Estimation at Completion)

(*) PD = Planned Duration

IEAC (t) = 20 / 1.05

IEAC (t) = 19.05

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Cost Management
 Summary

 There is a strong connection between

Time and Cost.
 Accuracy of estimates will depend upon
the phase where it is calculated.
 Is necessary have the schedule before
estimate costs.
 Cost and Time have the same Estimate
Techniques.

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Cost Management
 Summary
 There are two kinds of reserves:
Contingency and Manage Reserves.
 Cost Baseline includes Contingency
Reserves, and Cost Budget includes Cost
Baseline and Manage Reserve.
 Earned Value Management integrates Time,
Cost and Scope (work done) and its
variables are: PV, EV and AC.

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Cost Management
 Summary
 In Earned Schedule is important previous data
in order to perform linear interpolation
method.
 Earned Schedule consider its own SPI(t) and
IEAC(t)

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 References

Project Management Institute - PMI. (2017). Project

Management Body of Knowledge. (6th ed). Pensilvania:
PA, USA. Book Editor – PMI Publications.
AXELOS, The Stationery Office (editor) (2018)-
Managing Successful Projects with PRINCE2 2017
Edition-TSO

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Prepared by Prof Augusto Choy
Thank-you