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Project Cost Management

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Project Cost Management PMBOK 4th Edition * * * * * * * * * Conclusion When BAC is no longer attainable, the project manager should calculate a new EAC. – PowerPoint PPT presentation

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Title: Project Cost Management


1
Project Cost Management
  • PMBOK 4th Edition

2
Agenda
  • Broad Understanding of Project Cost Management.
  • Understand how software estimation is different.

3
PROCESS GROUPS
I
Planning
Estimate Costs
E
Budget Costs
Controlling
C
Control Costs
4
Estimate Costs
  • Cost estimating and Pricing
  • Cost estimating how much will it cost the
    performing organization to provide the product or
    service involved?
  • Pricing how much will the performing
    organization charge for the product or service?
    Business decision.
  • Estimating should be done by the person doing the
    work.

5
Estimate Costs
Inputs
Tools
Outputs
  1. WBS
  2. Resource requirements
  3. Resource rates.
  4. Act. duration est.
  5. Historical info.
  6. Chart of accounts
  7. Risks
  1. Analogous est.
  2. Parametric modeling
  3. Bottom-up est.
  1. Cost estimates
  2. Cost management plan
  • Based on the WBS to increase the accuracy.
  • Project managers should analyze the needs of the
    project, to compare and reconcile any differences
    with cost requirements from management.

6
Estimate Costs
  • Cost estimates for all resources that will be
    charged to the project.
  • Generally expressed in units of currency to
    facilitate comparisons both within and across
    projects.
  • Generally includes appropriate risk response
    planning.
  • Supporting detail must include
  • Reference to WBS.
  • How it was developed?
  • Assumptions made.
  • Range of possible results.
  • Cost management plan how cost variances will be
    managed.

7
Estimate Costs
  • View the Templates
  • Top Down
  • Experience Based/Analogy
  • Parametric
  • WBS
  • Roll up the numbers

8
Estimates vs. Accuracy
Estimate Accuracy
Order of Magnitude (Early) -25 75
Budget Estimate -10 25
Definitive Estimate -5 10
  • Most difficult to estimate as very little project
    info is available
  • Used to finalize the Request for Authorization
    (RFA), and establish commitment
  • Development stage estimate. Needed to predict
    revised project completion date

9
Tools for Estimating
Top Down Estimating Accuracy depends on experience Fast, but estimates are rough
Bottom Up Estimating Slow, but reliable High cost (time) / WBS needed Buy-in from the team
Parametric Modeling Mathematical models to predict costs Two types REGRESSION ANALYSIS, and LEARNING CURVE
Delphi Method (analogous) Expert judgment Tasks need not to be identified Considerable experience needed
10
Influencing Factors
  • Two sets of factors influence the ultimate cost
    of a system
  • Size Factors
  • Number, and type of functions
  • Project Factors
  • Project parameters that influence project costs.

11
Control Costs
Inputs
Tools
Outputs
  • Cost Baseline
  • Performance Reports
  • Change Requests
  • Cost Management Plan
  1. Cost Change Control System
  2. Performance Measurement
  3. Earned Value Management
  4. Additional Planning
  5. Computerized Tools
  1. Revised Cost Estimates
  2. Budget Updates
  3. Corrective Action
  4. Estimate at Completion
  5. Project Closeout
  6. Lessons learned
  • Understand what is driving variances, good and
    bad, and decide what action to take.

12
Case Study
  • Simple Case study requires you to master the
    following
  • EV Earned Value
  • PV Planned Value
  • AC Actual Cost

13
Budget Costs
  • The cost baseline will be used to measure and
    monitor cost performance of the project.

Expected Cash Flow
Cumulative Values
Cost Baseline
Time
14
Control Costs
  • To Control / Report Costs
  • And to Revise Costs and provide a new Estimate At
    Completion
  • Use Earned Value Method

15
Example
  • Painting your four walls.
  • Each wall 1000.
  • Total Budget At Completion (BAC)
    1000100010001000
  • Half way through you audit the work.
  • Let us consider two scenarios.

16
Scenario 1
  • One Wall is painted
  • Amount Spent is 500

17
Scenario 2
  • Two Walls painted
  • Amount Spent is 4000

18
What is the Revised EAC
  • For Scenario 2.

19
TCPI
  • What if CPI is consistently low.
  • Can you catch up somehow?
  • How will you know if it is not possible?
  • Read 18.6.1 about TCPI.

20
Case Study Project Book Contract
  • The Book Contract Project
  • 10 work packages
  • 10 chapters
  • Negotiated to be delivered 1 per month
  • Estimated cost of 100 each

21
Time to Complete Performance Index
(BAC)
This is equal to
22
Why pick TCPI?
  • The TCPI focuses on the remaining project
    activities.
  • It reflects what it will take in future
    performance to recover from a negative actual
    cost position.
  • Note It is effectively the mirror opposite of
    the cumulative CPI.

23
Weve all been there.
  • Youre a few months into a project and the first
    few deliverables have been completed.
  • You diligently calculate the CPI 0.9.
  • Your customer asks you about your plans for the
    cost overrun
  • No problem, well make it up
  • BUT CAN YOU?

24
Back to the Case Study..
Month 1 2 3
Planned Value 100 100 100
Earned Value 100 100 100
Actual Cost 110 110 110
Cumulative Earned Value (EV) 100 200 300
Cumulative Actual Cost (AC) 110 220 330
CPI EV/AC 0.89 0.89 0.89
25
TCPI calculation Work Remaining
  • The work remaining is
  • BAC EV 1,000 - 300 700
  • This is an estimate of the earned value
    remaining
  • The total earned value for the project is 1,000
  • We have completed 3 deliverables.
  • Work remaining 700.

26
TCPI Calculation Funds Remaining
  • The funds remaining are BAC AC 1,000 330
    670.
  • This is the remaining budget if we are to deliver
    as promised.

27
Project Moves on
  • 1.04 doesnt look too bad!
  • We have to achieve a CPI rate of 1.04 times of
    what we were working on.
  • Yes, We Can!
  • Yes, We Can!
  • Yes, We Can!

28
So Three More Months Three more Chapters
Month 1 2 3 4 5 6
Planned Value 100 100 100 100 100 100
Earned Value 100 100 100 100 100 100
Actual Cost 110 110 110 110 110 110
Cumulative Earned Value (EV) 100 200 300 400 500 600
Cumulative Actual Cost (AC) 110 220 330 440 550 660
CPI EV/AC 0.89 0.89 0.89 0.89 0.89 0.89
29
Three More Chapters
30
Uphill
  • To complete the project within budget, we now
    have to work at a rate 18 greater than we
    proposed.
  • In fact, we need a 29 improvement in our
    expenditure rate from 89 to 118!

31
TCPI Goes to 8 in month 8!
32
Estimates of Cost to Complete
  • The estimate of the final cost at completion is
    called the estimate at completion (EAC).

Next The PM should calculate the new EAC.
33
Analysis
  • The TCPI has the remarkable property that if we
    own up to the cost overrun and use the TCPI with
    the EAC in the denominator, then we can proceed
    at our current efficiency (defined by our current
    CPI) and hit the new cost target.

34
Conclusion
  • When BAC is no longer attainable, the project
    manager should calculate a new EAC.
  • This new estimate becomes the goal we will work
    towards if approved by stakeholders.
  • TCPI (BAC EV) / (EAC AC)

35
Conclusion
  • TCPI gives us a reality check analysis.
  • PM Our CPI is 0.9. We will deliver on budget,
    dont worry.
  • Auditor I have TCPI 1.2, implies 30 increase
    in productivity.
  • Auditor Are you Sure?

36
References
  • Provides a good overview and general guide to the
    principles of EVM.
  • Shows the EVM role in facilitating effective
    project management , Project Management
    Institute, 2005
  • The Two Most Useful Earned Value Metrics the CPI
    and the TCPI By Quentin W. Fleming and Joel M.
    Koppelman
  • Also Warburton and Kanabar Several PMI papers
    and Book
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