March 15, 2016

Project Cost Management


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Project Cost Management includes the processes involved in planning, estimating, budgeting, and controlling costs so that the project can be completed within the approved budget.

The three processes described in PMBOK for project cost management are

Cost Estimating

Cost Budgeting

Cost Control

Cost Estimating

Plan Cost Management
The Cost Management Plan establishes: i) level of accuracy and level of precision, ii) unit of measurement, iii) WBS procedure links (to control account (CA)), iv) control threshold, v) earned value rules of performance, reporting, funding and processes
Life cycle costing = total cost of ownership : production cost, running and maintenance cost, etc.
Estimate Costs

Similar to Estimate Activity Resources
Look for ways to reduce cost
ensure the SME to deliver the estimates (more accurate)
based on WBS

Cost Types
Variable costs – costs change with the amount of work, e.g. hourly consultants
Fixed costs – costs that are constant, e.g. equipment leases
Direct costs – directly attributed to the project
Indirect costs – shared costs like AC, lighting, etc.

Cost Estimate Tools

Analogous Estimating (Top Down Estimate) – compare to a similar project in the past (an estimating heuristic/rule of thumb)
Parametric Estimating – use a parameter and repetitive units of identical work
Bottom-up Estimating – detailed estimates of each individual activity from historical data, more accurate and time-consuming
Activity Cost Estimates may include indirect cost and contingency reserves
usually in a range of values
Basis of Estimates – detailed analysis on how the cost estimate was derived (assumptions, constraints, possible range (+/-15%), confidence level of final estimate)

Cost Budgeting

Determine Budget

Budget is more about when to spend money
Historical Relationships – analogous/parametric estimation
Reserve Analysis – addresses Management Reserve (unknown unknowns) and Contingency Reserve (known risks) [not included in calculation of earned value managment]
Funding Limit Reconciliation – addresses variance between funding limit (e.g. monthly or yearly limit) and planned expenditure, may require rescheduling of work to level of the rate of expenditure
Value Engineering – to improve quality/shorten schedule without affecting the scope
Project Budget = Cost baseline (the approved time-phased budget) + Management Reserve
when management reserve is used during project execution, the amount is added to the cost baseline
S-curve : total project expenditure over project lifecycle

Cost Control

Control Costs

Check against the Project Funding Requirements
including informing stakeholders of all approved changes and their costs
Earned Value Calculation
Index > 1: under budget/ahead of schedule
Index < 1: over budget/behind schedule
Estimate at Complete: 1) new estimate required (original flawed), 2) no BAC variance, 3) CPI will continue, 4) sub-standard cost/schedule will continue
TCPI: >1 not enough funding remain (over budget), <1 more fund available than needed (under budget)

Earned Value Accrual
Discrete Efforts – describes activities that can be planned/measured for output, including Fixed Formula (activity given a % of budget of work package at start and earn the remaining when completed, e.g. 50/50, 20/80 or 0/100), Weighted Milestone (earn value for milestones of deliverables of the work package), Percentage Complete, Physical Measurement
Apportioned Efforts – describes work that has a direct/supporting relationship to discrete work, e.g. testing, pm activities, calculated as % of the discrete work
Level of Efforts (LOE) – describes activities without deliverables, e.g. troubleshooting, assigned the earned value as scheduled, without schedule variance but may have cost variance
e.g. perform Control Cost weekly during execution where money is spent fastest
Variance Analysis – to check against the baseline for any variance
SPI at end of project must be 1
SPI is NOT telling much information to whether the project is on schedule as the Critical Path must also be investigated to get a meaningful picture.

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