Cost Management

Project Cost Management

Project Cost Management is the PMP Knowledge Area. Purpose of Project Cost Management:

  1. To complete the project within Budget.

Processes & Outputs

ProcessOutput
Plan Cost Management [Planning]Cost Management Plan
Estimate Costs [Planning]Activity Cost Estimates, Basis of Estimates
Determine Budget [Planning]Project Budget, Cost Baseline (Approved time phased project budget)
Control Costs [Monitoring and Controlling]We check cost performance and manage changes to the cost

Process Description

1. Plan Cost Management [Process / Planning] – We develop cost management plan in which we describe procedures for cost estimation, budgeting and controlling costs.

2. Estimate Costs [Process / Planning] – We estimate the cost of resources required to complete project activities and we document:
a. Activity Cost Estimates

b. Basis of Estimates

Techniques: 
a. Bottom-up Estimation – Best and very reliable. It is highly detailed estimation and provides definitive estimate. Its accuracy is -5% to 10%. It takes time and is expensive.
b. Analogous Estimation – It is quick, in-expensive but inaccurate.
c. Parametric Estimation – It is unit based estimation.
d. Expert Judgement
e. Three-Point Estimation
f. Reserve Analysis – Add cost contingency to manage identified risks. 

g. Vendor bid analysis – For doing the cost estimation, we will outsource. We will invite the quotation or bids and analyse them.
h. Cost of Quality – It means cost incurred on conformance to the requirements and non-conformance to the requirements.
       i. Cost of Conformance – Cost of Prevention [Preventing defects. Example: Money spent on getting the right process, right equipment, right people, training, etc.] and Cost of Appraisal [Example: Testing, Inspection, Review, Audit]
       ii. Cost of non-conformance – Cost of Failure (or Cost of Poor Quality) [Example: Re-work, repair, replacement, scrap, warranty cost]

3. Determine Budget [Process / Planning] – We add up cost estimates to prepare Project Budget. We time-phase project budget with the help of the schedule to prepare Cost Baseline. Shape of Cost Baseline is ‘S’ curve. Also, we add “Management Reserve” in the Project Budget for managing unidentified risks which is also known as Unknown Unknowns. Therefore, Project Budget = Cost Baseline + Management Reserve.

 

Money from the Management Reserve is allowed only when the unidentified risk occur. For getting money from the management reserve, we are required to raise the change request and get it approved by the change control board.

We reconcile fund requirements with the fund limits, if any. It leads to re-scheduling.

DurationFund RequirementsFund LimitsReconcile
1m$10M$8MIn the first month, plan work for $8M only and not for $10M
2m$20M$15M…..
3m$65M$65M…..
4m$5M$12M…..

4. Control Costs [Process / Monitoring and Controlling] – We check cost performance by conducting variance analysis and manage changes to the costs by following change control procedure.

In case of variance:

a. Find causes
b. Find corrective actions
c. Recommend it to Integrated Change Control for approval
 
After approval, there are 4 duties:
a. Give it to execution for implementation
b. Write approved changes in the Project Management Plan
c. Write lessons learned in OPAs
d. Inform concerned stakeholders
 
Techniques: 
a. Variance Analysis
b. Earned Value Management – Cost Variance and Cost Performance Index
c. To-Complete Performance Index (TCPI)
 
 
Earned Value Management (EVM) – EVM integrates scope, time, and cost.
PV = Planned Value = Budgeted Cost of Work Scheduled (BCWS)
EV = Earned Value = Budgeted Cost of Work Performed (BCWP)
AC = Actual Cost = Actual Cost of Work Performed (ACWP)
BAC = Budget at Completion
EAC = Estimate at Completion
ETC = Estimate to Complete
 
Example:
Performance of Day 1 :
Data : PV = $1000, EV = $750, AC = $900, BAC = $4000
 
1. Schedule Variance (SV) = EV – PV
SV = $750 – $1000 = -$250
 
2. Schedule Performance Index (SPI) = EV / PV
SPI = $750 / $1000 = 0.75
 
3. Cost Variance (CV) = EV – AC
CV = $750 – $900 = -$150
 
4. Cost Performance Index (CPI) = EV / AC
CPI = $750 / $900 = 0.83 [Interpretation: For every $1, 17 Cents are being wasted]
 
ValueSchedule VarianceCost Variance
> 0Ahead of ScheduleUnder Budget
= 0On timeWithin Budget
< 0Behind ScheduleOver Budget
ValueSchedule Performance Index
Cost Performance Index
> 1Ahead of ScheduleUnder Budget
= 1On timeWithin Budget
< 1Behind Schedule

Over Budget

Forecasting – As on date measurement. Its advantage is it gives alert.
1. For Entire Project
Estimate At Completion (EAC) = BAC / CPI
EAC = $4000 / 0.83 = $4819
 
2.For Remaining Project
Estimate To Complete (ETC) = EAC – AC
ETC = $4819 – $900 = $3919
 
To-Complete Performance Index (TCPI) – It is the new target of cost performance setup by the management.
TCPI = (Work Remaining in Money Terms) / (Fund Remaining) = (BAC – EV) / (BAC – AC)
TCPI = ($4000 – $750) / ($4000 – $900) = 1.05
 
TCPI Value:
> 1 : Performance need to be increased to stay within budget
< 1 : Performance can decrease to stay within budget
 

TCPI < 1 is preferred situation.

Exercise: Answer at-least 80% of the questions correctly in order to master the topic.
20 Questions Challenge
50 Questions Challenge