4- Project Cost Management (1)

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1. Project Cost Management Unit 7

12. 7.1 Estimate Costs 

19. 7.2 Determine Budget 

21. 7.2 Determine Budget 

26. 7.3 Control Costs ٦

34. Exercise . ٤

41. Questions Questions ٤

38. 5 pm Wednesday, Week 2 Total Cost to date – AC = $ 2,250 

42. 1- Half way through the executing processes of your project, a team member alerts you to a potential co st overrun for a specific deliverable. What do you do first? A ) Determine the projected actual cost. B ) Implement a change control process to track the change C ) Inform the customer. D ) Determine the cause of the overage ٤

62. Thank you Thank you . ٦

40. 5 pm Wednesday, Week 2 Performance Indices PV $1,800 EV $1,600 AC $2,250

٤ SPI = EV / PV = $1,600 / $1,800 = .9 CPI = EV / AC = $1,600 / $2,250 = .7

46. 3- A project manager has completed a detailed WBS and cost estimates for each work package. To create a cost baseline from this data, the project manager would : A ) Use the highest level of the WBS to estimate A ) Use the highest level of the WBS to estimate analogously B ) Sum up the work package and risk contingency reserve estimates. C ) Roll up work package estimates into a project t otal and add managements reserves. D ) Gain expert opinions of the project costs. ٤٦

52. 6- While completing your project, you realized that you need to decrease the project costs. After researchi ng your options, you came up with the following choice s. Which choice would DECREASE project costs? A ) Change to component A from component B. compone nt A A ) Change to component A from component B. compone nt A costs more to purchase, but has a lower life cycle cost than B. B ) Change activity A to be completed by resource B instead of resource c. resource B is more experienced worker. C ) Move activities B and H to occur concurrently, a nd accept a 30 percent increase in the risk that five more reso urces will be needed later. D ) Remove a test from the project management plan. ٥

58. 9- Feasibility study answers the question “can we do it?” cost benefit analysis answer the question--------- A ) Should we do it? A ) Should we do it? B ) Are the safety risks acceptable? C ) Is it beneficial to have a high level sponsor? D ) Does the technology exist? ٥

59. 9- Feasibility study answers the question “can we do it?” cost benefit analysis answer the question--------- A ) Should we do it? A ) Should we do it? B ) Are the safety risks acceptable? C ) Is it beneficial to have a high level sponsor? D ) Does the technology exist? ٥

60. 10- What tool must project managers rely upon to accurately identify the costs associated with the project? A ) A bill of materials A ) A bill of materials B ) A Gantt chart C ) A precedence diagram network D ) A work breakdown structure

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27. Earned Value Management Analysis Earned value technique (EVT) Compares the cumulative value of the budgeted cost of work Earned to both 1. The budgeted cost of work scheduled (planned) 2. The actual cost or work performed (actual)  An important part of Cost Control is to determine t he cause of a variance, the magnitude of the variance, and to decide if the var iance requires corrective action EVT uses the Cost Baseline contained in the project management plan to assess project progress and the magnitude of any va riations that occur

17. Reserve Analysis (Tools) Expert judgment (Tools) Historical Relationships (Tools) 7.2 Determine Budget  Historical Relationships (Tools)

39. 5 pm Wednesday, Week 2 Earned Value PV $1,800 EV $1,600 AC $2,250  Schedule Variance = EV -PV = $1,600 -$1,800 = ($200) Cost Variance = EV -AC = $1,600 -$2,250 = ($650)

44. 2 - Which type of costs is team training? A ) Direct B ) E V B ) E V C ) Indirect D ) fixed ٤٤

45. 2 - Which type of costs is team training? A ) Direct B ) E V B ) E V C ) Indirect D ) fixed ٤٥

48. 4- You are having difficulty estimating the cost of your project. Which of the following BEST describes the most probable cause of your difficulty? A ) Inadequate scope definition B ) Unavailability of desired resources C ) Lack of historical records from previous projects D ) Lack of company processes ٤

49. 4- You are having difficulty estimating the cost of your project. Whish of the following BEST describes the most probable cause of your difficulty? A ) Inadequate scope definition B ) Unavailability of desired resources C ) Lack of historical records from previous projects D ) Lack of company processes ٤

50. 5- Which of the following represents the value of work we have actually completed? A ) Earned value B ) Planned value B ) Planned value C ) Actual cost D ) Estimate to complete

٥

51. 5- Which of the following represents the value of work we have actually completed? A ) Earned value B ) Planned value B ) Planned value C ) Actual cost D ) Estimate to complete ٥

56. 8- The formula, EAC = BAC/CPI, assumes that: A ) All subsequent work will be completed at the planned expenditures. B ) All subsequent work will be completed at the planned expenditures, excluding the work packages planned expenditures, excluding the work packages currently under way C ) All subsequent work will be completed based upo n the cost performance to-date D ) The cost performance cannot change during the project ٥٦

61. 10- What tool must project managers rely upon to accurately identify the costs associated with the project? A ) A bill of materials A ) A bill of materials B ) A Gantt chart C ) A precedence diagram network D ) A work breakdown structure ٦

32. To-Complete Performance Index (TCPI) The calculated projection of cost performance that must be achieved on the remaining work to meet a specified management goal, such as the BAC or the EAC. Work Remaining / Funds Remaining  Work Remaining = ( BAC – EV ) Funds Remaining = ( BAC – AC ) Or ( EAC – AC ) TCPI = ( 400 – 60 ) / ( 400 – 90 ) = 1.096 OR TCPI = (400 – 60 ) / ( 606 – 90 ) = 0.658

36. Wall 1 100% = $ 1,000 How much work should have been completed - PV? 5 pm Wednesday, Week 2 PLANNED ٦ Wall 2 80% = $ 800 Wall 3 0% = 0 Wall 4 0% = 0 PV = $ 1,800

43. 1- Half way through the executing processes of your project, a team member alerts you to a potential co st overrun for a specific deliverable. What do you do first? A ) Determine the projected actual cost. B ) Implement a change control process to track the B ) Implement a change control process to track the change C ) Inform the customer. D ) Determine the cause of the overage ٤

47. 3- A project manager has completed a detailed WBS and cost estimates for each work package. To create a cost baseline from this data, the project manager would : A ) Use the highest level of the WBS to estimate A ) Use the highest level of the WBS to estimate analogously B ) Sum up the work package and risk contingency reserve estimates. C ) Roll up work package estimates into a project t otal and add managements reserves. D ) Gain expert opinions of the project costs. ٤

53. 6- While completing your project, you realized that you need to decrease the project costs. After researchi ng your options, you came up with the following choice s. Which choice would DECREASE project costs? A ) Change to component A from component B. compone nt A costs more to purchase, but has a lower life cycle cost than B. costs more to purchase, but has a lower life cycle cost than B. B ) Change activity A to be completed by resource B instead of resource c. resource B is more experienced worker. C ) Move activities B and H to occur concurrently, a nd accept a 30 percent increase in the risk that five more reso urces will be needed later. D ) Remove a test from the project management plan. ٥

2. Project cost management • Project cost management includes the processes invo lved in estimating, budgeting, and controlling costs so that the projec t can be completed within the approved budget • It is primarily concerned with the cost of the res ources needed to complete schedule activities • Should consider the information needs of the proje ct stakeholders • With proper planning, you can: • Adjust the project plan to conform to the budget • Track and manage cost once the project execution b egins • Compare actual cost to the original planned cost a nd analyze any variances between the two 

57. 8- The formula, EAC = BAC/CPI, assumes that: A ) All subsequent work will be completed at the planned expenditures. B ) All subsequent work will be completed at the planned expenditures, excluding the work packages planned expenditures, excluding the work packages currently under way C ) All subsequent work will be completed based upo n the cost performance to-date D ) The cost performance cannot change during the project ٥

14. Activity Cost Estimates (Inputs) Basis of Estimates (Inputs) Scope Baseline (Inputs) Project schedule (Inputs) Resource Calendars (Inputs) 7.2 Determine Budget ٤ Contracts (Inputs) Organizational Process Assets (Inputs) • Existing formal and informal cost budgeting-related policies, procedures • Cost budgeting tools,

54. 7- If earned value (EV) is U.S.$300000, actual cost (AC) is U.S.$350000, and planned value (PV) is U.S. $375000, what does the schedule performance index (SPI) indicate? A ) You are progressing at 86 % of the rate originally A ) You are progressing at 86 % of the rate originally planned. B ) You are progressing at 125% of the rate origina lly planned. C ) You are progressing at 116% of the rate origina lly planned. D ) You are progressing at 80% of the rate original ly planned. ٥٤

7. Scope Baseline Project Schedule The type and quantity of resources and the amount o f time which those resources are applied to complete the work of the p roject are major factors in determining the project cost. 7.1 Estimate Costs (Inputs)  factors in determining the project cost. Human Resource Plan Project staffing attributes, personnel rates, and r elated rewards/recognition

55. 7- If earned value (EV) is U.S.$300000, actual cost (AC) is U.S.$350000, and planned value (PV) is U.S. $375000, what does the schedule performance index (SPI) indicate? A ) You are progressing at 86 % of the rate originally A ) You are progressing at 86 % of the rate originally planned. B ) You are progressing at 125% of the rate origina lly planned. C ) You are progressing at 116% of the rate origina lly planned. D ) You are progressing at 80% of the rate original ly planned. ٥٥

13. • Determine Budget is the process of aggregating the estimated costs of individual activities or work packages to establ ish an authorized cost baseline. • This baseline includes all authorized budgets, but excludes management reserves. 7.2 Determine Budget • Project budgets constitute the funds authorized to execute the project. • Project cost performance will be measured against t he authorized budget.

15. Cost Aggregation (Tool) • Schedule activity cost estimates are aggregated by work packages in accordance with the WBS • Work package cost estimates are then aggregated for the higher component levels of the WBS, such as the control ac count, and ultimately for the entire project 7.2 Determine Budget ٥ Funding Limit Reconciliation (Tool) • The expenditure of funds should be reconciled with any funding limits on the commitment of funds for the project.

16. 5. Contingency reserves 6. Cost baseline 7. Management reserves 8. Cost budget 7.2 Determine Budget ٦ 1. Activity estimates 2. Work package estimates 3. Control Account estimates 4. Project estimates

35. Example - Wall Construction Wall Construction Time = 1 week per wall Cost = $ 1,000 per wall, materials and labor Total Schedule = 4 weeks ٥ Total Schedule = 4 weeks Total Cost = $ 4,000 Working days 5 day per week starting on Sunday and finish on Thursday by 5 PM Assume production is liner

6. 7.1 Estimate Costs The process of developing an approximation (estimat e) of the cost of the resources needed to complete each schedule activity • Estimator must consider the possible causes of vari ation of cost estimates, including risks ٦ estimates, including risks • Includes identifying and considering various costin g alternatives • Costs for schedule activities are estimated for all resources that will be charged to the project

10. • Activity Cost Estimates • Basis of Estimates • Project Document Updates 7.1 Estimate Costs (Outputs)

• Project Document Updates

29. • Schedule performance index (SPI) Is a measure of progress achieved compared to progr ess planned on a the project. SPI = ( EV / PV ) • Cost performance index (CPI) Is a measure of the value of work completed compare d to the actual cost on Earned Value Management Analysis  Is a measure of the value of work completed compare d to the actual cost on the project. CPI = ( EV / AC )

24. • Earned Value Management (Tools) • Forecasting (Tools) • To-Complete Performance Index (TCPI) (Tools) 7.3 Control Costs ٤ • Performance Reviews (Tools) • Variance Analysis (Tools)

22. 7.3 Control Costs Control Costs is the process of monitoring the stat us of the project to update the project budget and managing c hanges to the cost baseline. Project cost control includes: • Influencing the factors that create changes to the authorized cost baseline,  • Influencing the factors that create changes to the authorized 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 cost expenditures do not exceed the au thorized funding, by period and in total for the project, • Monitoring work performance against funds expended,

18. Cost Performance Baseline (Output) • The cost performance baseline is an authorized time -phased budget at completion (BAC) used to measure, monitor, and cont rol overall cost performance on the project. • It is developed as a summation of the approved budg ets by time period and is typically displayed in the form of an S-curv e Project Funding Requirements (Output) 7.2 Determine Budget  Project Funding Requirements (Output) • Total funding requirements and periodic funding req uirements (e.g., quarterly, annually) are derived from the cost base line. • The cost baseline will include projected expenditur es plus anticipated liabilities. • Funding often occurs in incremental amounts that ar e not continuous, which appear as steps

5. • The planning effort of the processes of the Cost Management Plan is a part of the develop project management plan ( Cost management plan can establish the following ) • Reporting formats - The format for various cost reports • Process descriptions - Descriptions of each of the three cost management p rocesses Cost Management Plan • Process descriptions - Descriptions of each of the three cost management p rocesses ٥

23. Project Management Plan (Input) The project management plan contains the following information that is used to control cost: • Cost Performance Baseline. • Cost Management Plan. 7.3 Control Costs  Organizational Process Assets (Input) • Existing formal and informal cost control-related po licies, procedures, • Cost control tools; and • Monitoring and reporting methods to be used Project Funding Requirements (Input) Work Performance Information (Input)

30. Example We are about to produce 20 tables in 20 days cost i s $20 for each. How much BAC = ??? BAC = $20 * 20 tables = $400 Today is day 4 How much is the PV ? Earned Value Management Analysis

Today is day 4 How much is the PV ? PV = $20 x 4 tables = $80 At day 4 i earned only 3 tables, how much is the EV ? EV = $20 x 3 tables = $60 AC = $90 SV = EV – PV = 60 – 80 = -$20 CV =EV – AC = 60 – 90 = -$30 SPI = EV / PV = 60 / 80 = 0.75 CPI = EV / AC = 60 / 90 = 0.666

4. Cost Management Plan • The planning effort of the processes of the Cost Management Plan is a part of the develop project management plan ( Cost management plan can establish the following ) • Precision level - The prescribed precision for rounding data related to schedule activity cost estimates activity cost estimates • Units of measure - Define units of measurement for each of the resour ces • Organizational procedure links - The WBS component used for the project cost accounting is called a control account (CA); each C A is assigned a code or account number • Control thresholds - Variance thresholds for cost at designated time po ints in the project to indicate the agreed to amount allowable variance ٤

28. • Earned Value. (EV) Value of work performed expressed in terms of the a pproved budget • Planned Value. (PV) Authorized budget assigned to the work to be accomp lished for an activity or work breakdown structure component. • Actual Cost. (AC) Earned Value Management Analysis  • Actual Cost. (AC) Total cost actually incurred and recorded in accomp lishing work performed for an activity or work breakdown structure compone nt. • Schedule Variance (SV) is a measure of schedule performance on a project. SV = ( EV – PV ) • Cost Variance (CV) is a measure of cost performance on a project. CV = ( EV – AC )

33. Project Performance Management Cost BAC EAC Data date Time PV AC EV SV = EV -PV CV = EV - AC

37. Wall 1 100 % = $ 1 , 000 5 pm Wednesday, Week 2 What is the budgeted value of actual work - EV? 10 % EARNED  Wall 1 100 % = $ 1 , 000 Wall 2 50% = $ 500 Wall 3 10% = $100 Wall 4 0% = 0 Total = $1,600 50 %

9. • Expert judgment • Analogous Estimating • Parametric Estimating • Bottom -Up Estimating 7.1 Estimate Costs (Tools & Techniques)  • Three-Point Estimates • Reserve Analysis • Cost of Quality (COQ) • Project Management Estimating software • Vendor Bid Analysis

8. Risk Register The risk register should be reviewed to consider ri sk mitigation costs. Enterprise Environmental Factors • Market conditions. • Published commercial information. 7.1 Estimate Costs (Inputs)  • Published commercial information. Organizational Process Assets • Cost estimating policies, • Cost estimating templates, • Historical information, and • Lessons learned.

31. Forecasting Estimate At Completion (EAC) actual costs incurred f or work completed, plus an estimate to complete (ETC) the remaining work. EAC = ( AC + ETC ) EAC forecast for ETC work performed at the budgeted rate EAC = AC + ( BAC – EV ) = 90 + ( 400 – 60 ) = $ 430 = 90 + ( 400 – 60 ) = $ 430 EAC forecast for work performed at the percent CPI EAC = BAC / CPI = 400 / .66 = $606.6 EAC forecast for ETC work considering both SPI and C PI factors EAC = AC + [ ( BAC – EV ) / ( CPI * SPI ) ] = 90 + [ (400 – 60 ) / ( 0.75 * 0.66 ) ] = $868.68

3. Process Process Group Group Initiating Initiating Planning Planning Executing Executing Monitoring & Controlling Monitoring & Controlling Closing Closing Knowledge Area Knowledge Area Integration Integration Develop Develop Project Project CCharter harter Develop Project Management Plan Develop Project Management Plan Direct Direct & Manage Project & Manage Project Execution Execution Monitor Monitor & Control Project Work & Control Project Work Close Close Project or Project or Phase Phase Perform Perform Integrated Change Control Integrated Change Control Scope Scope Plan Scope Management Plan Scope Management Collect Collect Requirements Requirements Validate Scope Validate Scope Define Define Scope Scope Control Control Scope Scope Create Create WBS WBS Time Time Plan Schedule Management Plan Schedule Management Define Define Activities Activities Control Control Schedule Schedule Sequence Sequence Activities Activities Estimate Estimate Activity Resource Activity Resource Estimate Estimate Activity Duration Activity Duration Develop Develop Schedule Schedule Cost Cost Plan Cost Management Plan Cost Management Estimate Estimate Costs Costs Control Control Costs Costs Knowledge Area Knowledge Area Cost Cost Estimate Estimate Costs Costs Control Control Costs Costs Determine Determine Budget Budget Quality Quality Plan Quality Management Plan Quality Management Perform Quality Perform Quality Assurance Assurance Control Quality Control Quality HRHR Develop Develop HR Plan HR Plan Acquire Acquire Project Team Project Team Develop Project Team Develop Project Team Manage Project Team Manage Project Team Comm. Comm. Plan Communication Plan Communicationmanagement management Manage Manage Communications Communications Control Communication Control Communication Risk Risk Plan Plan Risk Management Risk Management Control Control Risks Risks Identify Identify Risks Risks Perform Qualitative Analysis Perform Qualitative Analysis Perform Quantitative Perform Quantitative Analysis Analysis Plan Plan Risk Responses Risk Responses Procureme Procureme ntnt Plan Plan Procurements Procurements Conduct Procurements Conduct Procurements Control Procurements Control Procurements Close Procurements Close Procurements

11. Inputs • Enterprise Environmental Factors • Organizational Process Assets • Scope baseline • Project schedule Inputs • Enterprise Environmental Factors • Organizational Process Assets • Scope baseline • Project schedule Tools & Techniques • Analogous estimating • Expert judgment • Bottom-up estimating • Parametric estimating • Project Management Tools & Techniques • Analogous estimating • Expert judgment • Bottom-up estimating • Parametric estimating • Project Management Outputs • Activity Cost estimates • Basis of estimates • Project document updates Outputs • Activity Cost estimates • Basis of estimates • Project document updates 7.1 Estimate Costs • Project schedule • Human resource plan • Risk register. • Project schedule • Human resource plan • Risk register. • Project Management Software • Vendor Bid Analysis • Reserve Analysis • Cost of Quality • Three-point estimate • Project Management Software • Vendor Bid Analysis • Reserve Analysis • Cost of Quality • Three-point estimate

20. Inputs • Activity cost estimates • Basis of estimates • Scope baseline • Project schedule Inputs • Activity cost estimates • Basis of estimates • Scope baseline • Project schedule Tools & Techniques • Cost Aggregation • Reserve Analysis • Historical relationships • Expert judgment • Funding Limit Tools & Techniques • Cost Aggregation • Reserve Analysis • Historical relationships • Expert judgment • Funding Limit Outputs • Cost performance baseline • Project Funding Requirements • Project document updates Outputs • Cost performance baseline • Project Funding Requirements • Project document updates 7.2 Determine Budget 

• Project schedule • Resource calendars • Contracts • Organizational process assets • Project schedule • Resource calendars • Contracts • Organizational process assets • Funding Limit Reconciliation • Funding Limit Reconciliation • Project document updates • Project document updates

25. Inputs • Project management plan • Project Funding Requirements • Work Performance Inputs • Project management plan • Project Funding Requirements • Work Performance Tools & Techniques • Earned value management • Performance measurement Analysis • Forecasting • To - complete performance Tools & Techniques • Earned value management • Performance measurement Analysis • Forecasting • To - complete performance Outputs • Work Performance Measurements • Budget forecasts • Change requests • Recommended Corrective action Outputs • Work Performance Measurements • Budget forecasts • Change requests • Recommended Corrective action 7.3 Control Costs ٥ • Work Performance Information • Organizational process assets • Work Performance Information • Organizational process assets • To - complete performance index (TCPI) • Performance Reviews • Project Management Software • Variance analysis • To - complete performance index (TCPI) • Performance Reviews • Project Management Software • Variance analysis action • Organizational Process Assets (Updates) • Project management plan (Updates) • Project document (Updates) action • Organizational Process Assets (Updates) • Project management plan (Updates) • Project document (Updates)

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