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What is cost management?

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Project cost management includes the processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget. Project cost management is primarily concerned with the cost of the resources needed to complete project activities.

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Plan Cost Management Process

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is the process that establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs. They benefit of this process is that it provides guidance and direction on how the project costs will be managed.

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7.1 Plan Cost Management

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Inputs: Project management plan, Project Charter, EEF, OPA Tools: Expert Judgment, Analytical techniques, Meetings. Outputs: cost management plan **The cost management plan becomes a component of the Project Management Plan **Organizational policies and procedures may influence which financial techniques are employed in these decisions. Techniques may include (but are not limited to): payback period, return on investment, internal rate of return, discounted cash flow, and net present value. **The WBS component used for project cost accounting is called the control account. Each control account is assigned a unique code or account number(s) that links directly to the performing organization's accounting system.

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Estimate Cost Process

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is the process of developing an approximation of 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.

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7.2 Estimate Costs

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Inputs: Cost management plan, human resource management plan, scope baseline, project schedule, Risk register, EEf, OPA Tools: expert judgement, analgous estimating, parametric estimating, bottom-up estimating, three-point estimating, reserve analysis, cost of quality, project management software, vendor bid analysis, group decision-making techniques. Outputs: activity cost estimates, basis of estimates, and project document updates **Costs are estimated for all resources that will be charged to the project. **Three point estimating - Most likely, Optimistic, and Pessimistic --Triangular Distribution and Beta Disctribution

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What is a cost estimate?

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A cost estimate is a quantitative assessment of the likely costs for resources required to complete the activity

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What is Analogous cost estimating?

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Analogous cost estimating is frequently used to estimate a value when there is a limited amount of detailed information about the project, for example, in the early phases of a project. Analogous cost estimating uses historical information and expert judgment

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What is Bottom-up estimating?

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is 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

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What are Contingency Reserves?

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are the budget within the cost baseline that is allocated for identified risks which are accepted. Contingency reserves are often viewed as the part of the budget intended to address the "known-unknowns" that can affect the project (part or reserve analysis).

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Determine Budget Process

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is the process of aggregating these 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 baselines against which project performance can be monitored and controlled.

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7.3 Determine Budget

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Inputs: Cost management plan, scope baseline, activity cost estimates, basis of estimates, project schedule, resource calendars, risk register, agreements, and OPA Tools: Cost aggregation, reserve analysis, expert judgment, historical relationships, funding limit reconciliation Outputs: Cost baseline, project funding requirements, project document updates

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Project Budget Characteristics

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**A project budget includes all of the funds authorized to execute the project. The cost baseline is the approved version of the time-phased project budget, but excludes management reserves. **The cost baseline is typically displayed in an "S" curve

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Control Code Process

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is the process of monitoring the status of the project update to the project costs and managing changes to the cost baseline. The key benefit of this process is that it provides the means to recognize variance from the plan in order to take corrective action and minimize risk

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7.4 - Control Costs

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Inputs: project management plan, project funding requirements, work performance data, organizational process assets Tools: Earned value management, forecasting, to-complete performance index, performance reviews, project management software, reserve analysis. Outputs: Work performance information, cost forecasts, change requests, Project Management plan updates, project documents updates, organizational process assets updates

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Control Cost Characteristics/facts

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**Much of the effort of cost control involves analyzing the relationship between the consumption of project funds to the physical work being accomplished for such expenditures. **Work performance data - includes information about project progress, such as which activities have started, their progress, and which deliverables have finished.

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EAC

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estimate cost at completion

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Human resource management plan

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provides project staffing attributes, personnel rates, and related rewards/recognition, which are necessary components for developing the project cost estimates

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Direct Costs

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costs associated or linked directly to a project

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Indirect Costs

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are those costs that cannot be directly traced to a specific project and therefore will be accumulated and allocated equitably over multiple projects by some approved and documented procedure

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Management Reserves

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Is an amount of the project budget withheld for management control purposes and are reserved for unforeseen work that is within scope of the project. Management reserves are intended to address the "unknown-knowns" that can affect a project. Management reserve is NOT part of the cost baseline

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Activity Cost Estimates

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are quantitative assessments of the probable costs required to complete project work. Cost estimates can be presented in summary form or detail. Costs are estimated for all resources that are applied to the activity cost baseline.

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EVM

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Earned Value management, is a methodology that combines scope, schedule, and resource measurements to assess project performance and progress. EVM develops and monitors 3 key dimensions for each work package and control account which are: planned value, earned value, and actual cost.

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Planned Value (PV)

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is the authorized budget assigned to scheduled work. It is the authorized budget planned for the work to be accomplished for an activity or work breakdown structure component, not including management reserve.

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Earned Value (EV)

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Earned value (EV) is a measure of work performed expressed in terms of the budget authorized for the work. The EV being measured cannot be greater than the authorized PV. EV is often used to calculate the percent complete of a project

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Actual Cost (AC)

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is the realized cost incurred for the work performed on an activity during a specific time period. It is the total cost incurred in accomplishing the work that the EV measured. The AC will have no upper limit; whatever is spent to achieve the EV will be measured.

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Schedule Variance

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Schedule Variance (SV) is a measure of schedule performance expressed as the difference between the earned value and the planned value. It is the amount by which the project is ahead or behind the planned delivery date, at a given point in time. The EVM schedule variance is a useful metric in that it can indicate when a project is falling behind or is ahead of its baseline. SV=EV-PV

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Cost Variance

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is the amount of budget deficit or surplus at a given point in time, expressed as the difference between earned value and actual cost. It is a measure of cost performance on a project. It is the measure of cost performance on a project. The cost variance at the end of the project will be the difference between the budget at completion minus the actual amount spent. CV = EV-AC

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Schedule Performance Index (SPI)

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(SPI) The schedule performance index (SPI) is a measure of schedule efficiency expressed as the ratio of earned value to planned value. It measures how efficiently the project team is using time. **An SPI > 1.0 indicates less work was completed than was planned. **AN SPI < 1.0 indicates that more work was completed than was planned for. **SPI = EV/PV

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Cost Performance Index

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the cost performance index (CPI) is a measure of the cost efficiency of 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 > 1.0 indicates a cost overrun for work completed **CPI < 1.0 indicates a cost overrun of performance to date **CPI = EV/AC

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ETC

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estimate to complete

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EAC

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estimate at completion

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BAC

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budget at completion

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TCPI

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is the calculated cost performance index that is achieve 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. **EAC: (BAC-EV)/(EAC- AC)

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VAC

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Variance at completion **VAC = BAC - EAC

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Time Value of Money Net Present Value, NPV Concepts?

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PV, present value FV, future value NPV, net present value IRR, internal rate of return Payback period Break even analysis ROI, return on investment

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Depreciation Concepts?

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Purpose Straight line Accelerated

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Types of Costs

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Direct vs indirect Fixed vs variable Sunk cost Opportunity cost

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What is rough order of magnitude (ROM)?

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an estimate of costs and time provided in the early stages of a project when its scope and requirements has not been fully defined. An ROM is used to reduce the uncertainty of cost outcomes for both parties when project details have yet to be defined. It is the most difficult to estimate and made during the initiating process.

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Hierarchy of Costs

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Cost Budget Management Reserves Cost baseline Contingency reserves Project estimates Control account estimates work package estimates activity estimates

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Contingency Reserves

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the cost impacts of remaining risk. The known-unknowns

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Management reserves

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extra fund to cover unforeseen risk or changes to the project. The unknown-unknowns. They are an amount of the project budget withheld for management control purposes and are reserved for unforeseen work that is within scope of the project.

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When is analogous estimating most reliable?

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Analogous estimating is most reliable when the previous projects are similar in fact and not just in appearance, and the project team members preparing the estimates have the needed expertise

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When is analogous estimating most likely used?

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Analogous estimating is frequently used to estimate value when there is limited amount of detailed information about the project, for example, in the early phases of a project.

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What are the two common formulas used to perform three-point estimating?

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Triangular Distribution and Beta Distribution

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Difference between project budget and cost baseline

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A project budget includes all the funds authorized to execute the project. The cost baseline is the approved version of the time-phased budget, but excludes management reserves.

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What is reserve analysis and what can it establish?

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Budget reserve analysis can establish contingency reserves and management reserves for the project.

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Forecasting..

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EAC is always used as a form of forcasting - trying to figure out how much the rest of the project is going to cost you based on the data you have thus far

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what two EVM concepts are used to measure efficiency?

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SPI CPI

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What is NPV

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Net present value - takes into account for all future cash flows. Discounts both income and outlays. NPV > 0 is a GOOD investment and NPV < ) is a BAD investment

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Payback period

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the number of years until costs are covered. Dosent usually take "Time value of Money" into account ( as does NPV and IRR)

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IRR

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Internal Rate of Return - Average payback rate where costs = benefits. Discount rate where NPV = 0.

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Break Even Analysis

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The level of output when costs = benefits. It is usually reported in production units.

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ROI

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Return on Investment - popular accounting tool for identifying the value of an investment. Calculates the percentage paid back to the organization for the money spent. ** (gain from Inv. - Cost of Inv.)/ Cost of inv

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There are two types of depreciation..

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Straight-line and accelerated

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Straight line

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uses initial value, useful life (years), and salvage value **Yearly depreciation = (initial - salvage)/ years

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Accelerated

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allows for higher depreciation at the beginning of an assets life - sum of the years digits -double declining balance - MACRS

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Accuracy of estimate methods?

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Rough order magnitude (ROM) - during initiation Definitive Estimate - done at end of planning.

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Cost baseline

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Expected actual cost of activities plus contingency reserves = cost baseline

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is the management reserve included in the cost baseline?

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NO!!!!! ya heard?!

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What is a reserve?

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a provision in the project management plan to mitigate cost and/or schedule risk

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contingency reserve

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budget within the cost baseline that is allocated for identified risks that are accepted and for which contingent or mitigating responses are developed. - known-unknowns - included in budget - included in cost baseline - not part of earned value calculations

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The BAC is also known as

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PMB - Performance Measurement Baseline

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Does BAC change

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BAC does not EVER change unless the project is rebaselined.

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Can Forecasting be used for both cost and schedule?

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NO! You idiot!!! Forecasts only COSTS - not schedule

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Forecasting requires computation of what?

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ETC - Estimate to Complete & EAC - Estimate at Completion

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ETC definition

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the amount of money needed to complete the project from this point, ignoring all SUNK costs **ETC = EAC - AC

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EAC definition

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the forecasted total cost of the project. Use BAC as a comparison always. **EAC = ETC + AC

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There are how three way to calculate EAC

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atypical variances EAC= AC+BAC-EV typical variances EAC=BAC/CPI Bottom-up (new estimate) EAC=AC+ revised EAC

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