Chapter 7 - Project Cost Management
Terms in this set (16)
Chapter 7 Project Cost Management
The process that established policies, procedures, and documentation for planning, managing, expending, and controlling project costs. The key benefit of this process is that it provides guidance and direction on how the project costs will be managed throughout the project.
The cost management processes and their associated tools and techniques are documented in the cost management plan. The cost management plan is a component of the project management plan.
7.1.1 Plan Cost Management: Inputs
1 Project Management Plan
ADIS 18.104.22.168 Contains information used to develop the cost management plan IBNT:
- Scope baseline
- Schedule baseline
- Other Information - cost-related scheduling, risk, and communications decisions from the project management plan.
.2 Project Charter
ADIS 22.214.171.124 Provides a summary of the budget from which the detailed costs are developed. The project charter also defines the project approval requirements that will influence the management of the project costs.
.3 Enterprise Environmental Factors.
.4 Organizational Process Assets
7.1.2 Plan Cost Management: Tools and Techniques
.1 Expert Judgement
.2 Analytical Techniques
7.1.3 Plan Cost Management: Outputs
.1 Cost Management Plan
A component of the PM plan and describes how the project costs will be planned, structured, and controlled. The cost management processes and their associated tools and techniques are documented in the cost management plan. The cost management plan can establish the following:
- Units of measure
- Level of precision - estimates rounded up or down
- Level of accuracy
- Organizational procedures links - provides the framework for the cost management plan,allowing for consistency with the estimates, budgets, and control costs. The WBS component used for project cost accounting is called the control account. Each account assigned a unique code or account number that links to the org accounting system.
- Control thresholds - typically expressed as percentage deviations from the baseline plan.
- Rule of performance measurement. - EVM rules for peformance measurement are set. The cost management plan may:
- Define the point in the WBS at which measurement of control accounts will be performed:
- Establish the earned value measurement techniques to be employed
- Specify tracking methodologies and EVM computation equations for calculating projected estimate at completion forecasts to provide a validity check on the bottom-up EAC.
- Reporting formats - formats and frequency of the various cost reports are defined.
- Process description - descriptions of each of the other cost management processes are documented.
- Additional details
IBLT description of stategic funding choices, procedure to account for fluctuation in currency exchange retes and procedure for project cost recording.
7.2 Estimate Costs
The process of developing an approximation to the monetary resources needed to complete project activities. The key benefit of this process is that it determines the amount of cost required to complete project work.
Cost estimates are a prediction that is based on the information known at a given point in time. Cost estimates include the identification and consideration of costing alternatives to initiate and complete the project. Cost trade-offs and risks should be considered, such as make versus buy, buy versus lease, and the sharing of resources in order to achieve optimal costs for the project.
Cost estimates should be reviewed and refined during the course of the project to reflect additional detail as it becomes available and assumptions are tested. Rough order of magnitude (ROM)
7.2.1 Estimate Costs: Inputs
.1 Cost Management Plan
ADIS 126.96.36.199 Defines how project costs will be managed and controlled. Includes the method used and the level of accuracy required to estimate activity cost.
.2 HR Management Plan
ADIS 188.8.131.52 Plan staffing attributes, personnel reates, and related rewards/recognition, which are necessary components.
.3 Scope Baseline
Comprised of the following:
- Project scope statement provides the product description, acceptance criteria, key deliverables, project boundaries, assumptions, and constraints about the project. One basic assumption that needs to be made when estimating project costs is whether the estimates will be limited to direct project costs only or whether the estimates will also include indirect costs. Indirect costs are those costs that cannot be directly traced to a specific project and therefore will be accumlated or allocated eqitable over multiple projects by some approved and documented accounting procedure.
- Work breakdown structure
- WBS dictionary
Additional information that may be found in the scope baseline includes contractual and legal implications, such as health, safety, security, performance, environmental, insurance, intellectual property rights, licenses, and permits.
.4 Project Schedule
ADIS 184.108.40.206. The type and quantity of resources and the amount of time which those resources are applied to complete the work of the project are major factors in determining the costs. Schedule activity resources and their respective durations are used as key inputs to this processe. Estimate Activity Resources involves determining the availability of staff, the number of staff hours required, and quantities of material and equipment needed to perform schedule activities. It is closely coordinated with cost estimating. Activity duratin estimates 220.127.116.11 will affect cost esitimates on project where the project budget includes an allowance for the cost of financing and where resources are applied per unit of time for the duration of the activity.
.5 Risk Register
ADIS 18.104.22.168 The risk register should be reviewed to consider risk response consts. Risks, which can be either threats or opportunites, typically have an inpact on both activity and overall project costs.
.6 Enterprise Environmental Factors
ADIS 2.1.5 The enterprise environmental factors that can influence the Estimate Costs process IBNLT:
- Market conditions
- Published commercial information - information found in a database.
.7 Organizational Process Assets
ADIS 2.1.4 The organizatinal process assets that influence the Estimate Costs process IBNLT:
- Cost estimating policies,
- Cost estimating templates,
- Historical informatin, and
- Lessons learned.
7.2.2 Estimate Costs: Tools and Techniques
.1 Expert Judgement
Guided by historical information, provides valuable insight about the environment and information prior similar projects. Can be used to determine whether to combine methods of estimating and how to reconcile the differences between them.
.2 Analogous Estimating
Cost estimating uses the values such as cope, cost budget, and duratin and measures of schall such as size, weight, and complexity form a previous, similar project as the basis for estimating the same parameter or measurement for a current project. When estimating costs, this technique relies on the actual cost of previous, similar projects as the basis for estimating the cost of the current project.
Frequently used to estimate a value when there is a limited amount of detailed information about the project.
Less costly and less time consuming than other techniques, but also generally less accurate.
.3 Parametric Estimating
Uses a statistical relationship between relevant historical data and other variables to calcualte a cost estimate for project work.
.4 Bottom-Up Estimating
A method of estimating a component of work. The cost of individual work packages or activities is estimated to the greatest level of specified detail. Detailed cost is then summarized or "rolled up" to higher levels for subsequent reporting and tracking purposes.
.5 Three-Point Estimating
Accuracy of single-point activity cost estimates may be improved by considering estimatin uncertainty and risk and sing three esitmates to define and approximate rang for an activity cost:
- Most likely (cM): The cost of the activity, based on realistic effort assessment for the required work any predicted expenses.
- Optimistic (cO). The activity based on analysis of the best-scenario for the activity.
- Pessimistic (cP). The activity based on analysis the wort-case scenario the activity.
Two commonly used formulas are triangular and beta distributions. The formulas are:
- Triangular Distribution. cE =(cO + cM + cP)/3
- Beta Distribution (from a traditional PERT analysis). cE=(cO+cM+cP)/6
Cost estimates based on the three points with an assumed distribution provide and expected cost and clarify the range of uncertainty around the expected costs.
.6 Reserve Analysis
Cost estimates may include reserves (sometimes called contingency allowances) to account for cost uncertainty. Contingency reserves are the budget within the cost baseline that is allocated for identified risks, which are accepted and fro which contingent or mitigating responses are developed. Contingnency reserves are often viewed as the part of the budget intneded to aaddress the "known-unknowns" that can affect a project. Contingency reserves may be estimated to account for this unknown amount of rework.
Management reserves are intended to address the "unknown unknowns" that can affect the project.
.7 Cost of Quality (COQ)
ADIS 22.214.171.124 may be used to prepare the activity cost estimate.
.8 Project Management Software
.9 Vendor Bid Analysis
.10 Group Decision-Making Techniques
An assessment process having multiple alternatives with an expected outcome in the form of future actions. Used for engaging team members to improve estimate accuracy and committed to the emerging estimates.
7.2.3 Estimate Costs: Outputs
Activity cost estimates are quantitative assessments of the probable costs required to complete the project work. Cost estimates can be presented in summary form or in detail. Costs are estimated for all resources that are applied to the cost estimate. IBLT: facilities, technology, labor, materials, etc. Indirect costs, if the are included in the project estimate, can be included at the activity level or at higher levels.
.2 Basis of Estimates
The amount and type of additional details supporting the cost estimate vary by application area. Regardless of the level of detail, the supporting documentation should provide a clear and complete understanding of how the cost estimate was derived.
Supporting detail for activity cost estimates may include:
- Documentation of the basis for the estimate (i.e., how it was developed)
- Documentation of all assumptions made.
- Documentation of known constraints
- Indication of the rang of possible estimates to indicate that he item is expected to cost betwen a rang of values.
- Indication of confidence level of the final estimate.
.3 Project Documents Updates
7.6 Determine Budget
The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. The key benefit of this process is that it determines the cost baseline against which project performance can be monitored and controlled.
A project budget includes all the funds to execute the project. The cost baseline is the approved version of the time-phased project budget, but excluded management reserves.
7.3.1 Determine Budget: Inputs
.1 Cost Management
.2 Scope Baseline
- Project scope statement
Formal limitation by period for the expenditure of project funds can be mandated by the organization, by statement ADIS 126.96.36.199, or by other entities such as government agencies. Constraints are reflected in the project scope statement.
ADIS 5.4 provides the relationships among all the project deliverables and their various components.
- WBS Dictionary
.3 Activity Cost Estimates
Cost estimates for each activity within a work package are aggregated to obtain a cost estimate for each work package.
.4 Basis of Estimates
.5 Project Schedule
ADIS 188.8.131.52 Included planned and start and finish dates for the project's activites, milestones, work packages, and control accounts
.6 Resource Calendars
184.108.40.206 and 220.127.116.11 Provide information on which resoucres are assigned to the project and when they are assigned.
.7 Risk Register
ADIS 18.104.22.168 The risk register should be reviewed to consider how to aggregate the risk response costs.
ADIS 22.214.171.124 Applicable agreement information and costs relating products, services or results that have been and will be purchased are included when determining the budget.
.9 Organizational Process Assets
ADIS 2.1.4 Influences the the Determine Budget process, IBLT
- Existing formal and informal cost budgeting-related policies, and guidelines;
- Cost budgeting tools; and
- Reporting methods
7.3.2 Determine Budget: Tools and Techniques
.1 Cost Aggregation
Cost estimates are aggregated by work packages in accordance with the WBS. The work package cost estimates are then aggregated for the higher component levels of the WBS and ultimately for the entire project.
.2 Reserve Analysis
Budget reserve analysis can establish both the contngency reserves and the management reserves for the project ASIS 126.96.36.199.
.3 Expert Judgement
.4 Historical Relationships
.5 Funding Limit Reconciliation
The expenditure of funds should be reconciled with any funding limits on the commitment of funds for the project.
7.3.3 Determine Budget: Outputs
.1 Cost Baseline
The approved version of the time phased project budge, excluding any management reserves, which can only be changed through formal change procedures and is used as a basis for comparison to actual results. It is developed as a summation of the approved budget for different schedule activities.
.2 Project Funding Requirements
Total funding requirements and periodic requirements are derived for the cost baseline. Cost baseline will include projected expenditures plus anticipated liabilities.
.3 Project Documents Updates
IBLT: Risk register, avtivity costs, estimates, and project schedule.
7.4 Control Costs
The process of monitoring the status of the project update and the project costs and managing changes to the cost baseline. The key benefit of this process is that it provides a means to recognize variance form the plan in order to take corrective action and minimize risk.
Any increase to the authorized budget can only be approved through the Perform Integrated Change Control Process (Section 4.5). Monitoring the expenditure of funds without regard tot he value of work being accomplished for such expenditure has little vale to the project, other than allow the project team stay within the authorized funding.
Project cost control includes:
- Influencing the factor that create changes to the oaurthorized 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 the cost expenditures do not exceed the authorized 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 cost performance to isolate and understand variances from the approved cost baseline;
- Monitoring work performance against funds expended;
- Preventing unapproved changes fro being included in the reported cost or resource usage;
- Informing appropriate stakeholders of all paproved changes and associaed costs; and
- Bringing expected cost overruns within acceptable limits.
7.4.1 Control Costs: Inputs
.1 Project Management Plan
- Cost Baseline
- Cost management plan
.2 Project Funding Requirements
.3 Work Performance Data
ADIS 188.8.131.52 Included information about progress, shc as activities have started, their progress, wand which deliverables have finished. also includes costs that have been authorized and incurred.
.4 Organizational Process Assets
ADIS 2.1.4 Can influence Control Cost process IBLT:
- Existing formal and informal cost control-related policies, procudures and guidelines;
- Cost control tools; and
- Monitoring and reporting methods to be used.
7.4.2 Control Costs: Tools and Techniques
.1 Earned Value Management (EVM)
A methodology that combines scope, schedule an resource measurements to assess project performance and progress. it a a commonly used method of performance measurement for projects. It integrates the scope baseline with the cost baseline, along with the schedule baseline, helps the PM team assess and measure project performance and progress. EVM develops and monitors 3 key dimensions for each work package and control account:
- Planned Value (PV)
The authorized budget assigned to scheduled work. It is the authorized budget planned for the work to be accomplished for activity or WBS component, not including management reserve. Allocated by phase over life of project. Also referred to as the performance measurement baseline (PMB). The total planned value for the project is AKA budget at completion (BAC).
- Earned Value (EV)
A measure of work performed and expressed in terms of the budget authorized for that work. It is the budget associated with the authorized work that has been completed. The EV measured needs tob e related to the PMB, and the EV cannot be gate than the authorized PV budget for a component. The EV oftent used to calculate the percent complete of a project. Progress measurement criteria should be established for each WBS component to measure WIP. PM monitor EV, both incrementally to determine current status and cumulatively to determine the long-term performance trends.
- Actual Cost (AC)
The realized cost incurred for the work performed on an activity during a specific time. Needs to correspond in definint to what was bugeted int eh PV and measured inthe EV. The AC will have no upper limit; whatever is spent o achieve the EVE will be measured.
Variances from the approved baseline will also be monitored:
- Schedule Variance (SV)
A measure of schedule performance expressed as the differenc between the earned valed and the planned vale. It is the amount by which the project is ahead or behind the planned delivery date, at a given point or time. It is equal to the EF minus the PV. The EVM schudle varianc is a useful metric in that it can indicate when a project is falling behind or is ahead of its baseline schedule. SV is best used in conjunction with CPM scheduling and and risk management. SV = EV-PV
- Cost variance - The amount of budget deficit or surplus at a given point in time, expressed as the difference between earned vale and actual cost. It is a measure of cost performance on the project. Indicates the relation ship of physical performance to the costs spent. CV=EV-AC.
SV and CV values can be converted to efficiency indicators to reflect the cost and schedule performance of any project for comparison against all other projects or within a portfolio of projects. The variances are useful for determining project status.
- Schedule performance index (SPI)
Measure of schedule efficiency expressed as a ratio of earned value to planned value. It measures how efficiently the project is using its time. It is sometimes used in conjunction with the cost performance index (CPI) to forecast the final project completion esttimates. An SPI value less than 1.0 indicates less work was completed than was planned. If greater than 1.0 then more work was done than planned. SPI is equal to the ratio of th EV to the PV. Equation SPI=EV/PV.
- Cost Performance Index (CPI)
I a measure of the cot efficiency as budgeted resources, expressed as a ratio of earned value to actual cost. It is considered the most critical EVM metric and measures the cost efficiency for the work completed. CPI value of less than 1.0 indicates a cost overun for work completed. Greater than 1.0 indicates underun of performance to date. CPI is equal to the ratio of the EV to the AC. Equation CPI = EV/AC.
The project tam may develop a forecast for the estimate at completion (EAC) that may differ the from the budget at completion (BAC) based on the project performance. If it becomes obvious that the BAC is no longer viable, the PM should consider the EAC. Forecasting the EAC involves making projections of conditions and events in the poject's future based on current performance information and other knowledge available at the time of the forecast. Forecasts are generated, updates and reissued based on the work performance data (Section 184.108.40.206) that is provided as the project is executed. The work performance information covers the project's past performance and any other information that could impact the project in the future.
EACs are typically based on the actual costs incurred for work completed, plus an estimate to complete (ETC) the remaining work. It is incumbent on the project team to predict what it may encounter to perform the ETC, based on the experience to date. The EVM method works well in conjunction with manual forecasts of the requred EAC costs. The EVM method works ell in conjunction with manual forecasts of the required EAC costs. The most common EAC forecasting approach is a manaul, bottom-up summation by the PM and project team.
The project manager's manual bottom-up EAC method builds upon the actual costs and experience incurred for the work completed, and requires a new estimate to complete the remaining project work. Equatin: EAC = AC + Bottom-up ETC.
The project manager's manual is quickly compared with the range of calculated EACs representing various risk scenarios. When calculating EAC values, the cummulative CPI and SPI values are typically used. While EVM data quickly provide many statistical EACs, only three of the more common methods are described as follows:
- EAC forecast for ETC work performed at the budgeted rate.
This EAC method accpets the actual project performance to date (favorable or unfavorable) as represented by the actual costs, and predicts that all future ETC work will be accomplished at the budgeted rate. When actual performance is unfavorable, the assumptions that future performance will improve should be accepted only when supported by the project risk analysis. Equation EAC=AC+(BAC-EV)
- EAC forecast to ETC work performed at the present CPI. This method assumes what the project has experienced to date can be expected to continue in the future. The ETC work is assumed to be performed at the same cumulative CPI as that incurred by the project to date. Equation: EAC=BAC/CPI.
- EAC forecast ETC work considering both SPI and CPI factors.
The ETC work will be performed at an efficiency rate that considers both the cost and schedule performance indices. This method is most useful when the project schedule is a factor impacting the ETC effort. Variations fo thies method weight the CPI and SPI at different values (e.g. 80/20, 50/50, or some other ratio) according to eh PM's judgement. Equation: EAC = AC + [(BAC-EV)/(CPIxSPI)]
Each of these approaches is applicable for any give project and will provide the PM team with an "early warning" signal if the EAC forecasts are not within acceptable tolences.
.3 To-Complete Performance Index (TCPI)
A measure of the cost performance that is required to be achieve with the remaining resources in order to meet the specified management goal, expressed as the ration of the cost to finish the outstanding work to the remaining work to meet a specified management goal, expressed as the ratio fo the cost to finish the outstanding work to the remaining budget. TCPI is the calculated cost performance index that is achieved on the remaining work to meet a specified management goal, such as the BAC or the EAC. If it becomes obvious that the BAC is no longer viable, the project manager should consider the forecasted EAC. Once approved, the EAC may replace the BAC in the TCPI calculation. The equation for the TCPI basedon the BAC: (BAC-EV)/(BAC-AC).
If the cumulative CPI falls below the baseline, all future work of the project will need to be performed immediately in the range of the TCPI (BAC) to stay withing the authorized BAC. This level of performance is displayes as the TCPI (EAC) line. The equation of rth TCPI bpased on the EAC: (BAC-EV)/(EAC-AC).
.4 Performance Reviews
Compare cost performance over time, schedule activities or work packages overunning the underrunning the budget, and estimated funds needed to complete the work in progress. If EVM is being used, the following information is determined:
- Variance analysis
Is the explainantion for cost (CV=EV-AC), schedule (SV=EV-PV), and variance at completion (VAC=BAC-EAC) variances. Cost and schedule variance are the most frequently analyzed measurements.
- Trend analysis
- Earned value performance
Compares the performance measurement baseline to actual schedule and cost performance. If EVM in snot used then the analysis of the cost baseline against actual costs for the work performed is used for cost performance comparisons.
.5 PM Software
Is often used to monitor the three EVM dimensions (PV, EV, and AC), to display graphical trends and to forecast a range of possible final project results.
.6 Reserve Analysis
During cost control, reserve analysis is used to monitor the status of contingency and management reserves for the project to determine if these resrves are still needed or if additional reserves need to be requested.
7.4.3 Control Cost: Outputs
.1 Work Performance Information
The calculated CV, SV, CPI, SPI, TCPI and VAC values for the WEBS components, in particular the work packages and control accounts,are documented and communicated to stakeholders.
.2 Cost Forecasts
A calcuatled EAC value or Bottom up EAC value is doucumented and communicated to stakeholders.
.3 Change Requests
Analysis of a project performance may result in a change request to the cost baseline or other components of the project management plan.
.4 Project Management Plan Updates
- Cost Baseline. Changes to the cost baseline are incorporated in response to approved changes in scope, activity resources, or cost estimates. In some cases, cost variances can be so severe that a revised cost baseline is needed to provide a realistic basis for performance measurement.
- Cost management plan.
Changes in the cost management plant such as changes to control thresholds or specified levels of accuracy required in managing the project's cost, are incorporated in response to feedback and relevant stakeholders.
.5 Project Documents Updates.
- Activity cost estimates; and
- Basis of estimates
.6 Organizational Process Assets Updates
- Causes of variances,
- Corrective action chosen and the reasons,
- Financial databases, and
- Other types of lessons learned from project cost control.
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