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Project Cost Management Cheat Sheet by

The basics of project cost management
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What is Project Cost Management

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

What is a cost management plan?

During the Develop Project Management Plan process the management team develops a cost management plan, included as part of the project management plan. It describes the form and criteria for planning, estima­ting, budgeting, and contro­lling project costs. It covers the "­How­" of cost management for project.

What does the Cost Management Plan address?

- Level of accuracy - what rounding is used in cost estimating
- Units of measure - days, weeks, dollars, Euros
- Organi­zat­ional procedure links, partic­ularly through the specif­ication of control accounts in the WBS
- Control thresh­olds, to set an agreed­-upon level of variance before triggering response.
- Rules of perfor­mance measur­ement, including choices affecting use of Earned Value Management
- Reporting formats for cost reports
- Process descri­ptions of the three cost management processes.

What types of costs should be identi­fied?

- Variable vs. Fixed
- Direct vs. Indirect
- Recurring vs. Non-re­curring
- "­All­owe­d" costs for contract projects
- Price, if the project is done under contract for an external customer

What are the Project Selection Cost Measures?

- ROI : Return on Investment
- IRR : Internal Rate of Return
- NPV : Net Present Value
- BCR : Benefit Cost Ration
For the above, pick the highest value

- Payback Period, pick shortest duration
- Opport­unity Cost: the cost of projects not selected for execution

What is Future Value?

Future Value is the value of something at a specific time in the future.

FV = PV * (1 + r)to the n power

PV = Present Value
r = Interest Rate
n = Number of Periods
FV = Future Value

What is Present Value?

Present Value is the value of something today to create a certain value in the future.

PV = FV / (1 + r) to the n power

PV = Present Value
r = Interest Rate
n = Number of Periods
FV = Future Value

What is deprec­iation?

Deprec­iation is devaluing an asset in the tax system. There are two kinds:

- Standard deprec­iation, where the difference between start value and scrap value is divided by the number of periods.
- Accele­rated deprec­iation, which generally requires tables of data to calculate. Two types are Sum of the Years Digits, and Double Declining Balance (DDB). Deprec­iates faster than standard. (just recognize these terms)
 

Inputs, Tools and Techni­ques, Outputs

What is the Process - 7.1 Estimate Costs?

- Develop an approx­imation of the costs of resources required for project activities
- Estimates are based on the inform­ation known at a particular time, and can be expected to be reflined as the project proceeds, from a rough order of magnitude estimate during initiation in the +/- 50% range, to a later definitive or control estimate within a range of +/- 10%.
- Costs estimated include labor, materials, equipment, services, facili­ties, and special categories like inflation.

What are the INPUTS of the process - Estimate Costs?

1. Scope baseline, includes the project scope statement, the WBS, and WBS dictio­nary. These are the sources of inform­ation about components and products of the project, as well as assump­tions and constr­aints.
2. Project schedule, Which includes the quantity and amount of time resources will be required. This achieves the close linkage between Estimate Activity Resources and Estimate Costs.
3. Human resource plan, indicates staffing requir­ements, cost rates, related reward costs
4. Risk register, so that risk mitigation costs are included in cost estimates.
5. Enterprise enviro­nmental factors, including market conditions and published commercial databases or seller price lists.
6. Organi­zat­ional process assets, including cost estimation policies and templates, along with historical inform­ation and lessons learned

What are the TOOLS and TECHNIQUES of the process - Estimate Costs?

1. Expert judgement, to guide the applic­ation of historical and other inform­ation in determ­ining project estimates.
2. Analogous estima­ting, which uses historical inform­ation from a previous project. Analogous estimating is useful when inform­ation and time are limited, but is not as accurate as detailed estima­ting.
3. Parametric estimating
4. Bottom-up estima­ting, which estimates at the lower levels then accumu­lates cost upward. It's more accurate than analogous estimate.
5. Three point estimates. Allows consid­eration of a range of possible estimates.
6. Reserve analysis, to set up contin­gency reserves to account for cost uncert­ainty. Contin­gency reserves are part of the project's funding requir­ements.
7. Cost of quality, to provide for quality assurance and control costs of the project.
8. Project management estimating software, including things like comput­erized spread­sheets, simulation and statis­tical tools
9. Vendor bid analysis in which vendor cost bids are analyzed to determine reasonable "­should costs" estimates.

What are the OUTPUTS of the process - Estimate Costs?

1. Activity costs estimates, in summary form or in detail
2. Basis of estimates includes detail necessary to support the estimate and how it was determ­ined. Also indicates the range of possible results as an indicator of the expected accuracy of the estimate.
3. Project document updates including the risk register.

What are Reserves?

- Contin­gency reserves are allowances for unplanned but potent­ially required changes resulting from the risks identified in the risk register. Included in the cost baseline.
- Management reserves are budgets reserved for unplanned changes to project scope and costs, and will usually require the project manager to obtain approval before spending management reserves.
- Management reserves are not included in cost baseline, but may be included in the project budget, and are not included in project earned value calcul­ations.

Describe the Process - Determine Budget.

Aggreg­ating the estimated cost of individual schedule activities or work packages to establish a total cost baseline for measuring project perfor­mance. It includes all authorized budgets but excludes management reserves.

What are the INPUTS of the process - Determine Budget?

1. activity cost estimates, from Estimate Costs process
2. Basis of estimates, from Estimate Costs
3. Scope baseline, containing the scope statement, which may contain limita­tions by period for project expend­itures from the organi­zation, contract, or government agency. It also includes the WBS and WBS dictio­nary.
4. Project schedule, from Develop Schedule, which provides the "­whe­n" for costs.
5. Resource calendars, which may indicate resource costs over the length of the project (e.g. rate increases)
6. Contracts for products, services or results that are purchased.
7. Organi­zat­ional process assets, including policies, proced­ures, and guidelines related to budgeting, as well as budgeting tools and reporting methods.

What are the TOOLS AND TECHNIQUES of the process - Determine Budget?

1. Cost aggreg­ation, which aggregates by work package, then to higher levels such as control accounts, and ultimately the entire project cost
2. Reserve analysis, to establish contin­gency and management reserve requir­ements.
3. Expect judgement, partic­ularly related to the applic­ation area of the project.
4. Historical relati­onships for parametric or analogous estimates
5. Funding limit reconc­ili­ation, to relate timing of expend­itures to any limita­tions on the commitment of funds during the project.

What are the OUTPUTS of the process - Determine Budget?

1. Cost perfor­mance baseline, an authorized time-p­hased budget used to measure and monitor project cost perfor­mance. Sumss the approved budget expend­itures by time period, and is displayed as an S-curve showing accumu­lated expend­itures over time.
2. Project funding requir­ements, which are set in a step function to stay ahead of the cost baseline consid­ering cash flow delays.
3. Project document updates, including cost estimates, project schedule, and the risk register.

How is the Cost Baseline usually graphed?

The Cost Baseline is usually displayed as an S curve.

Describe the process - 7.3 Control Costs.

The process of monitoring project status to updates project budget and managing changes to the cost baseline.
This effort includes updating actual costs spent.
Any increase to the budget must be approved through Perform Integrated Change Control
As we monitor costs we also must ensure that we are receiving value for the cost expended. We will find the earned value management technique useful in this context.

What does Contro­lling Costs include?

Contro­lling costs includes:
- influe­ncing factors that create changes to the cost baseline
- Ensuring requested changes are acted on timely
- Managing the actual changes when and as they occur
- Assuring that expend­itures do not exceed the authorized funding by period and in total for the project.
- Monitoring cost perfor­mance to detect and understand variances from the cost baseline.
- Monitoring work perfor­mance against funds expended
- Preventing incorrect, inappr­opr­iate, or unapproved changes from being included in the reported cost or resource use.
- Informing approp­riate stakeh­olders of approved changes
- Acting to bring expected cost overruns within approved limits.

What are the INPUTS of the process - Control Costs?

1. Project management plan, which contains the cost management plan and the cost perfor­mance baseline
2. Project funding requir­ements from Determine Budget
3. Work perfor­mance inform­ation which comes from Direct and Manage Project Execution, and provides delive­rable status, actual costs and estimates for cmpleted work
4. Organi­zat­ional process assets, including cost control policies, proced­ures, and guidel­ines, as well as tools and monitoring and reporting methods.

What are the TOOLS AND TECHNIQUES of the process - Control Costs?

1. Earned value management
2. Foreca­sting
3. To-com­plete perfor­mance index
4. Perfor­mance reviews
5. Variance analysis
6. Project management software

What are the OUTPUTS of the process - Control Costs?

1. Work perfor­mance measur­ements (CV, SV, CPI, and SPI) for WBS components and control accounts.
2. Budget forcasts
3. Organi­zat­ional process assets updates with historical inform­ation and lessons learned
4. Change requests when the baseline must be changed. These are processed through Perform Integrated Change Control process.
5. Project management plan updates, including the cost perfor­mance baseline and the cost management plan
6. Project document updates, including cost estimates and basis of cost estimates
 

What is Earned Value Management (EVM)?

-Earned value is a commonly used method of measuring project perfor­mance. It integrates scope, cost, and schedule measures.
- The focus is the accurate measur­ement of physical perfor­mance against a detailed plan
- It also allows for accurate prediction of the final costs and schedule
- Earned value management requires an integrated baseline against which to measure perfor­mance

Earned Value Management Overview

- EVM measures true cost perfor­mance "what we got for what we spent."­
- It has three dimensions of data:
1. The Planned Value (PV) of the work
2. The Earned Value (EV) of the physical work accomp­lished
3. The Actual Costs (AC) incurred to accomplish the earned Value
- Two critical Variances may be determ­ined: Scheduled Variance and Cost Variance
- Variances may be converted into indices:
-- Schedule perfor­mance index
-- Cost perfor­mance index

What is Earned Value (EV)?

Earned Value (EV) is the budgeted value of work completed during the selected time period.

What is Planned Value (PV)?

Planned Value is the budgeted cost for the work scheduled during the selected time period.

What is Actual Cost (AC)?

Actual Cost is the actual cost of work performed during the selected time period.

What is Schedule Variance (SV)?

Schedule variance is the earned value minus the planned value (EV - PV)

What is Cost Variance (CV)?

Cost Variance (CV) is the earned value minus the actual cost (EV - AC)

What is Schedule perfor­mance index (SPI)?

Schedule Perfor­mance Index (SPI) is the earned value divided by the planned value (EV/PV).

What is Cost Perfor­mance Index (CPI)?

Cost Perfor­mance Index (CPI) is the earned value divided by the actual cost (EV/AC).

What is the difference between Variances VS. Perfor­mances Indexes?

- Variances are measured in absolute values, like dollars.
- Perfor­mance indices are ratios
- A variance indicates where you are. A perfor­mance index measures how well you are performing against planned efficiency
- Both are useful measures
- Variance: plus good, minus bad
- Index: more than 1 good, less than 1 bad

How do you establish EV for in-process work packages?

The Measur­ement method should be specified in the cost management plan

- Keep the EV calcul­ation method as simple as possible
- The first EV analysis should be performed at the 15-20% period of the project life cycle.

Measur­ement methods:
- 0/100 : No credit until its done - You unders­tat­e/c­ons­erv­ative
- 50/50 : Take 50% when you start and 100 when done
- % Complete : Base on estimating and prone to subjective opinion
- Milestone
- Apport­ioned Effect : Divy % of hours to various tasks
- Level of Effort
 

Foreca­sting

What is Foreca­sting?

- Making estimates or predic­tions of conditions in the project's future based on inform­ation and knowledge available at the time of the forecast.
- As the project progre­sses, the project team may develop a forecast of the estimated cost at completion that is signif­icantly different from the original budget at comple­tion.
- At all times, the estimate at completion is equal to the actual costs so far, plus an estimate to complete the remaining project work.

Foreca­sting Terms

ETC - Estimate to complete
EAC - Estimate at completion
BAC - Budget at completion

How do you determine Variance at comple­tion?

Variance at Completion = Budget at Completion - Estimate at Completion

VAC = BAC-EAC

How do you determine % Complete (perfo­rma­nce)?

Earned Value / Budget at Completion

EV/BAC

How do you determine % Completion (sched­ule)?

Project Value / Budget at Completion

PV/BAC

What are the three approaches of Foreca­sting?

1. EAC forecast for ETC at the budgeted rate: EAC = AC + BAC - EV
2. EAC forecast for ETC at the cumulative CPI: EAC = BAC / CPI
3. EAC forecast for ETC consid­ering both the CPI and SPI factors. This is used when we have a negative cost perfor­mance to date, and must meet a firm schedule date commit­ment. EAC = AC + (BAC - EV) / (CPI X SPI)

When is To Complete Perfor­mance Index (TCPI) used?

To Complete Perfor­mance Index (TCPI) is used to determine cost perfor­mance efficiency required to complete project within the original budget (BAC) or revised budget (EAC).

1. Revised Budget: TCPI (EAC) = (BAC-E­V)/­(EA­C-AC)

2. If budget can NOT be revised:
TCPI (BAC) = (BAC/E­V)/­(BA­C-AC)

How are Perfor­mance Reviews used?

Perfor­mance Reviews are used to compare cost perfor­mance over time, schedule activities or work packages over-r­unning and under-­running budget (Planned Value), milestones due, and milestones met.
1. Variance analysis
2. Trend analysis
3. Earned value perfor­mance

How is Variance Analysis used?

The cost management plan, created in Develop Project Management Plan, describes how cost variances will be managed.
- Example: response might be different for major versus minor variance. Plan would define what consti­tutes minor, and what to do
- Variances should decrease as project progre­sses; therefore the definition of minor variance may change during the project

How is Project Management Software used?

Software may be used to process actual costs and the EVM values, and to display graphical trends.

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