Tag: Project Cost Management

Project Cost Management Summary 6th Edition

Project Cost Management Summary 6th Edition

 

  1. Cost estimates  include  the  identification  and  consideration  of  costing  alternatives  to initiate and complete the project.
  1. Cost trade-offs and risks should be considered to achieve optimal costs for the project.
  2. The accuracy of a project estimate will increase as the project progresses through project life cycle.
  1. In project initiation phase have a rough order of magnitude (ROM) estimate in the range of  (-25%  to  +75%).  Later  in  projects  when  more  information  is  known  definitive estimate could narrow the range to (-5% to +10%).
  1. Analogous Estimating, Parametric Estimation, Bottom-UP Estimating &  Three-Point Estimating. In schedule summary.
  1. Reserve Analysis. In schedule summary.
  2. Cost of  Quality:  Assumptions  about  costs  of  quality  may  be  used  to  prepare  the estimates.
  1. Estimate Costs Outputs:

✓  Cost Estimates:

➢  Cost  estimates  include  quantitative  assessments  of  the  probable costs required to complete project work and contingency amounts to account  for  identified  risks,  and  management  reserve  to  cover unplanned work.

➢  Cost estimates can be presented in summary form or in detail.

✓   Basis of Estimates:

➢  Supporting  documentation  should  provide  a  clear  and  complete understanding of how the cost estimate was derived (assumptions, constraints, …).

  1. Determine Budget  is  the  process  of  aggregating  the  estimated  costs  of  individual activities or work packages to establish an authorized cost baseline.
  1. Project budget includes all the funds authorized to execute the project.
  2. Business Documents:

✓  Business  case:  identifies  the  critical  success  factors  for  the  project  like financial success factors.

✓  Benefits management plan: includes the target benefits, such as net present value  calculations,  timeframe  for  realizing  benefits,  and  the  metrics associated with the benefits.

  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.
  1. Historical Information Review:

✓  Reviewing  historical  information  can  assist  in  parametric  or  analogous estimates.

✓  Historical information may include project characteristics (parameters) to develop mathematical models to predict total project costs.

  1. Funding limit Reconciliation:

✓  The expenditure of funds should be reconciled with any funding limits on the commitment of funds for the project.

  1. Financing: Financing entails acquiring funding for projects for long lasting projects. External funding may require certain requirements.
  1. Cost Baseline:

✓  Approved  version  of  the  time-phased  project  budget,  excluding  any management reserves. is used as a basis for comparison to actual results.

✓  The  work  package  cost  estimates,  along  with  any  contingency  reserves estimated for the work packages, are aggregated into control accounts. The summation of the control accounts makes up the cost baseline.

✓  Time-phased view of the cost baseline is typically displayed in the form of an S-curve.

  1. Project Funding Requirements :   Total  funding  requirements  and  periodic  funding requirements are derived from the cost baseline.
  1. Any increase to the authorized budget requires an approved change.
  2. Earned value analysis (EVA):

✓  compares the performance measurement baseline  to the  actual  schedule  and cost performance.

✓  EVM integrates the scope baseline  with  cost  and  schedule baselines  to form the performance measurement baseline (PMB).

  1. Variance Analysis:

✓  Cost and schedule variances are the most frequently analyzed measurements.

✓  Cost performance  measurements  are  used  to  assess  the  magnitude  of variation to the cost baseline and decide whether corrective or preventive action is required.

  1. Trend Analysis:

✓  examines project performance  over time  to determine if performance is improving or deteriorating.

✓  Graphical analysis techniques are valuable for understanding performance  and comparison to future performance goals in the form of BAC vs EAC.

✓  Charts:  In  earned  value  analysis,  three  parameters  of  planned  value, earned value, and actual cost can be monitored and reported.

✓  Forecasting:  Project  team  may  develop  a  forecast  for  the  estimate  at completion (EAC) that may differ from the budget at completion (BAC).

  1. Reserve Analysis:

✓  Reserve  analysis  is  used  to  monitor  the  status  of  contingency  and management reserves for the project to determine if these reserves are still needed or if additional reserves need to be requested.

✓  This reserve may be used as planned to cover cost of risk response.

✓  when opportunities are captured and resulting in cost savings, funds may be  added  to  the  contingency  amount,  or  taken  from  the  project  as margin/profit.

  1. To-Complete Performance Index (TCPI):

✓  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.

  1. Work Performance Information:

✓  Includes information on how the project work is performing compared to the cost baseline.

✓  Variances in the work performed and the cost of the work are evaluated at the work package level and control account level.

  1. Equations:

✓  Earned value analysis (EVA): 4 Key terms.

➢  PV  =Planned  Value:   The  value  of  the  work  planned  to  be  completed  to  a  point  in  time,  usually  the  data  date,  or  project  completion.

➢  EV=Earned Value:  The planned value of all the work  completed  (earned) to a point in time, usually the data date, without reference  to actual costs.

➢  AC=Actual Cost :  The actual cost of all the work  completed to a  point in time, usually the data date.

➢  BAC=Budget at Completion: The value of total planned work, the  project cost baseline.

✓  Variance Analysis:

➢  Schedule Variance (SV): The difference between Earned Value and Planned Value.

❖  SV = EV – PV

❖  SV< 0, Behind schedule

❖  SV>0, Ahead of schedule

❖  SV=0, On schedule

➢  Cost  Variance  (CV):  The  difference  between  Earned  Value  and Actual Value.

❖  CV = EV – AC

❖  CV< 0, Over budget (Over planned cost)

❖  CV>0, Under budget (Under planned cost)

❖  CV=0, On budget (On planned cost)

➢  Schedule  Performance   Index   (SPI):   A   measure   of   schedule efficiency expressed as the ratio of earned value to planned value.

❖  SPI = EV / PV

❖  SPI<  1, Behind schedule

❖  SPI> 1, Ahead of schedule

❖  SPI= 1, On schedule

➢  Cost  Performance Index  (CPI): A measure of the cost efficiency  of budgeted resources expressed as the ratio of earned value to actual  cost.

❖  CPI = EV / AC

❖  CPI<  1, Over planned cost

❖  CPI> 1, Under planned cost

❖  CPI= 1, On planned cost

✓  Trend Analysis:

➢  Estimate   at   Completion   (EAC):  The   expected   total   cost   of completing all work expressed as the sum of the actual cost to date and the estimate to complete.

❖  EAC = BAC/CPI     If the CPI is expected to be the same for the remainder of the project.

❖  EAC = AC + BAC – EV   If future work will be accomplished at the planned rate.

❖   EAC = AC + Bottom-up ETC   If the initial plan is no longer valid.

❖  EAC = AC + [(BAC –  EV) /  (CPI x SPI)] If both the CPI and SPI influence the remaining work.

➢  Estimate to Completion (ETC): The expected cost to finish all the  remaining project work.

❖  ETC = EAC – AC   Assuming work is proceeding on plan, the cost of completing the  remaining authorized work.

❖  ETC = Re-estimate   Re-estimate the remaining work from the bottom up.

➢  Variance at  Completion  (VAC): The estimated difference in cost at the completion of the project.

❖  VAC = BAC – EAC

❖  Positive = Under planned cost

❖  Neutral = On planned cost

❖  Negative = Over planned cost

✓  To-Complete Performance Index (TCPI):

➢  A measure of the cost performance that must 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 budget available.

➢  TCPI = (BAC –  EV)  /  (BAC –  AC)  The efficiency that must be maintained in order to complete on plan                                    ❖  Greater than 1.0 = Harder to complete

❖  Exactly 1.0 = Same to complete

❖  Less than 1.0 = Easier to complete

➢  TCPI = (BAC –  EV)  /  (EAC –  AC)  The efficiency that must be maintained in order to complete the current EAC.

❖  Greater than 1.0 = Harder to complete

❖  Exactly 1.0 = Same to complete

❖  Less than 1.0 = Easier to complete

  1. Important Notes:

➢  Three-point estimate is more accurate than parametric estimate.

➢  Assessment   is  proper  action  that  should  be  taken  by  project manager.

➢  Regression analysis >>>> based on one line estimation.

➢  Parametric estimate >>>> depend on expert judgement technique.

➢  Light weight estimation >>>> high level forecast project.

➢  Scope  and schedule are  adjusted to stay with cost constraint >>>> Strick budget.

 

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