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Cost Management
Cost Management includes processes
involving budgeting, estimating, and
controlling costs to complete a project
within the required budget.
Some important terminology involved in Cost Management includes:
Sunk Cost – Cost that should not be considered anymore because it has been incurred in the past and
cannot be recovered.
Opportunity Cost – This is the difference in value between on path versus the alternative.
Value Analysis (Engineering) – A cost reduction that does not affect the scope of the project.
Payback Period – The time period it takes to recover an investment.
Discount Rate – A rate used to calculate the present value of expected yearly benefits and costs.
Net Present Value (NPV) – The difference between the Present Value of cash inflows and the Present Value of
cash outflows (cost).
Return on Investment (ROI) – The measurement of the amount of return on an investment in relation to
the cost of the investment.
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The first of four key elements to Cost
Management is Planning Cost.
Planning
Estimating
Cost
Project Cost
Determining
Project
Budgets
Controlling
Project Costs
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Planning Cost involves thoroughly
documenting how costs will be
planned, structured, and controlled.
To start with, a Planning Cost includes doing research as well as knowing the
project overall budget (described in the project charter) and the project scope and
schedule baselines (described in the project management plan).
Key concepts of Planning Cost:
Enterprise Environmental Factors (EEF) – The most influential in planning a project cost, the EEF includes all
factors that are not in control of the project team that could influence the project work. Such factors include
legislation, naturally phenomena, and infrastructure. Also included as EEF factors are:
Market Conditions: This can affect the ability to obtain required resources at an affordable rate
Currency Exchange Rates: For international project, the exchange rate can influence the project budget
and resource acquisitions.
Organizational Process Assets (OPA) – The plans, processes, policies, and procedures that are used by
an organization to manage a project. OPA can include historical records as well as well as current
project related documentation.
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By developing a Cost Management
Plan, project cost can establish the
estimated costs for every part of a project.
Using expertise from staff, outside estimates, and cost analyses, a PMP can determine
whether to make or buy components, buy or lease equipment, and set a logical financial metrics
to make future cost decisions. With these metrics in place, a Cost Management Plan can be established.
Information Needed for Plan
How will costs be recorded:
A detailed description of what metric will be used to record cost. Common units
of measurement include hours, dollars, days, etc.
Precision level of costs:
Define the amount of detail wanted when recording costs (ie. $100, $1000, etc)
Which costs will be tracked:
Define what reporting formats you want on the project (ie. Internal resources,
overhead costs, executive salaries, etc)
Systems used to track and
report costs:
Define what variances are allowed and how you want cost reported (ie. Work
breakdown structure, company’s account codes, etc)
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Once information about the Cost
Management Plan is gathered, a PMP needs
to determine how to execute the information.
A PMP must define when during the project the cost management plan should be executed and
how often. This schedule should be maintained and updated throughout the project lifecycle.
Execution of Information
How cost is recorded:
Will cost be entered manual into an automated system? Kept in a separate
document? Which WBS items do the costs belong to?
When cost is recorded:
Define whether the costs should be entered weekly, monthly, etc.
How to measure scope and
budget performance:
Define the measurement methods that will be used throughout the project upfront.
When to record costs or
procured items:
Will costs be recorded when the order is place? When the order is received? After
the order is invoiced? Refer to the account policies of your organizations and have
a consistent method to track and report costs.
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The second of four key elements to
Cost Management is Estimating
Project Cost.
Planning
Estimating
Cost
Project Cost
Determining
Project
Budgets
Controlling
Project Costs
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Estimating Project Cost is the
development of an approximation of the
costs of resources needed to complete a project.
During this phase of the project of PMP should look for ways to reduce
cost. There are several different cost types that PMP should be aware of.
Key cost types:
Variable Cost – Cost that should can change with the amount of work. An example of a variable cost
would be a consultant paid by the hour.
Fixed Cost – Cost that is constant throughout the life cycle of the project. An example of a fixed cost would
be a lease on equipment used.
Direct Cost –Cost that is directly attributed to the project. An example of a direct cost
would be the procurement of a required product or service.
Indirect Cost – Cost that is shared such as lighting, AC, etc.
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There are several tools a PMP
can use to estimate cost.
Common Cost Estimate Tools:
Analogous Estimating – This is a Top Down Estimate. This tool is used to compare the current project to a
similar project that was successfully completed in the past. This estimation based on historical information
gives the PMP an idea of what the actual cost of an activity or task should be.
Parametric Estimating – This tool uses a calculates the cost by using parameters and repetitive units of
identical work. This is a quick method, useful if the historical information is accurate.
Bottom-Up Estimating – This tool decomposes an identified task or activity and estimates the subtask from
historical data. Then when each subtask cost is calculated, the subtasks can be summed to give the whole
activity cost. This method is more accurate but time-consuming. An example is shown below.
Subtask Estimates
Inspect Unit = $70
Sign Lease =
$700
Software Design= $40
Unit Design = $70
Activity Estimates
Lease Requirements =
$770
Design Requirements =
$120
Project Activity Package
Expenses
Project Cost = $890
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Once the cost is derived, the
PMP must explain how the
cost was calculated.
Ways to explain the cost calculation:
Activity Cost Estimates. These estimates may include indirect costs and
reserves. This should be a quantitative assessment of the likely costs need to
acquire the project resources in order to complete the project per the
schedule.
Activity Cost Estimates Supporting Detail. The activities usually range in cost value, so for
each activity, the PMP must clearly describe how the cost was derived and the reasoning
behind the cost. This detail should include the reasoning for the cost, why the activity is
required, the constraints, and the basic values and information. This can also be called the
Basis of Estimates.
Note: Draw from experience of your team, use technology, and always analyze the risk when
predicting and explain the costs of a project.
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The third of four key elements to
Cost Management is Determining
Project Budgets.
Planning
Estimating
Cost
Project Cost
Determining
Project
Budgets
Controlling
Project Costs
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Unlike Cost Estimating, which is
mostly how money is spent, a Project
Budget is mostly about when to spend money.
Expert judgement, whether it be from team member or a financial advisor, should
be used when building a budget. One of the most common techniques used when
developing a budget is cost aggregation.
Cost Aggregation – summing the costs per week of project work until the project is completed. This
sum up will be at the total project level and will measure all costs from the beginning of the project
to the end.
Estimate
Week 1
Week 2
Week 3
Week 4
Total Project Cost
Sign the Lease
Remodel the Kitchen
$3,000
$500
$1000
Insult the House
$100
Redo Roofing
$500
$100
$500
Weekly Total
$3,500
$1600
$100
$500
Cumulative Cost
$3500
$5100
$5200
$5700
$5700
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As part of estimating the budget,
a PMP must do a reserve analysis in
addition to the cost aggregation.
The budget calculated for the reserve is preformed during the project execution phase. The total
amount calculated is then added to the project baseline. This is for identified risk and meant to
reduce risk by having some fund already allocated in the event of a risk occurring.
The reserve analysis, including a contingency or management reserve, is calculated to provide a
provision should a project risk occur during the project lifecycle. This is used to mitigate cost and
schedule risk.
Contingency Reserve – part of the budget that is set aside for identified risks within the scope of the
project. Mitigating responses should be developed along with the contingency reserve. This is include as
part of the baseline.
Management Reserve – part of the budget that is set aside for unplanned, in-scope work. This is not
included as part of the baseline but is part of funding requirements.
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Since budgeting costs are normally
estimates, a PMP should double
check the calculated budget.
Key ways to review budget:
Expert Judgement. Use the expertise on your team to help review the budget and bring up any
concerns or questions. The knowledge skills and experience on the team will very and discussing the budget
before finalization can lead to more accurate time and cost estimates.
Historical Relationships. Another technique is to compare the project budget to successful project budgets from the
past. Industry data is also a good source to compare project budgets and different phases of the project lifecycle.
Fund Limit Relationships. When graphing your costs over time and adding all the funds required, the results should
be compared to the defined project scope and limitations. Realizations that can arise from this activity could be that
an activity needs to be scheduled for a different week or funds need to be spent by a certain date.
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When finally plotted, the total
project budget should form an Scurve over the project lifecycle.
800
Budgeted Cost
600
C0ST ($K)
The budget cost plot should
form an S Curve when
funding requirements are
plotted versus over the length
of the project, which can then
be used as the cost baseline
and plotted with the actual
cost as the project progresses
to provide a performance
measure.
Project Schedule vs Cost Estimates
400
Actual Cost
200
0
Jan
Feb
Mar
Apr
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The first of four key elements to
Cost Management is Planning Cost.
Planning
Estimating
Cost
Project Cost
Determining
Project
Budgets
Controlling
Project Costs
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Controlling costs involves
managing factors that can cause changes
to the project budget and influence cost
variations.
To be sure to control cost correctly, several sources of information must be
looked over.
Key informational sources:
Cost Baseline. This information should be used to compare costs that were planned to
actual costs.
Cost Management Plan. This document should inform the PMP as to what the acceptable variance
for cost performance are.
Work Performance Data. This information includes what phase each activity is in, which costs have been
approved, and were additional costs have been accrued.
Project Funding Requirements. This information explains which funs are required for expenditures and
reserves.
Organizational Process Assets (OPA). These documents include policies and procedures that inform the
PMP how to manage and report project costs.
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There are different tools that PMPs
can use to control cost. The first of
three tools to be discussed is the
cost change control system.
Cost Change Control System. A system following approved procedures that outline how changes to the cost base line
can be introduced to the project.
Note: Procedures should also include how to inform stakeholders of all approved changes and the costs associated
with each change.
Identify
Change
Submit
Change
Request
Change
Approved
Inform
Stakeholder
s
Implement
Changes
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Another tool that can be used is the
performance measurement analysis.
Performance Management Analysis is a method for comparing the costs that are recorded
to the predetermined cost baseline. In order to perform this analysis several factors are needed.
Key components:
Planned Value (PV). The budgeted cost for scheduled work for a specific time frame. For example, if an activity should
cost $50 when completed and grows linearly over the course of the activity, the PV for the activity when is half-way
completed is 50% of the total cost ($25).
Earned Value (EV). The budgeted cost for completed work for a specific time frame. For example, the maximum
earnable value for an activity is its total cost. If an activity is completed for 20% of the budgeted cost, the EV is 20% of
the total cost (earnable value).
Actual Cost (AC). Total cost accrued according to the schedule over a specific time frame.
Cost Variance (CV). EV –AC. This is used to determine if money has been lost during an activity. (CV < 1, money has
been lost. CV > 1 activity cost less then planned, excess funds)
Schedule Performance Index (SPI). SPI = EV/PV . The SPI does not give much information about whether
the project is on time, but it must be 1 at the end of the project.
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Forecasting is tool used to
control future costs.
Forecasting is used to determine future cost values based on lesson learned
during the project life.
Key components:
Estimate to Complete (ETC). Costs needed to complete a task. Based on how the project has
been going this value could be a new estimate or recalculated based on similar tasks that cost
more than expected.
Estimate at Completion (EAC). Based on project costs after a certain time period, this is a new estimate
of the total costs. This is calculated by taking the accumulation of costs already spent and the
accumulation of the ETCs for each activity yet to be completed.
Variance at Completion (VAC). The difference between the estimated cost at completion (EAC)
and the actual budget when the project is completed.
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Once the cost is analyzed, several
pieces of valuable information can be
used to update the project schedule or budget.
Outcomes of Cost Management:
Typical outcome of cost management include a list of changes that need to be requested and a list
of corrective actions that could be accomplished to keep project cost down.
Updates that could be made from information gathered:
Cost Management Plan – Depending on how severe the cost variances are, the cost management plan may need to
be reevaluated.
Cost Estimates – As the project develops, cost estimates should be revisited and updated based on newly completed
activity costs. Also, if costs are updated, a basis for the update must be explained.
Cost Baseline – As cost estimates get updated or new risks are recognized, the baseline may need to be updated by
going through a formal change control process.
Note: A document should be maintain of lessons learned throughout the project to better manage and
estimate costs later in the project or for similar projects in the future.
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Knowledge Check
Start
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1. If the Earned Value is equal to
Actual Cost, it means:
A. Project is on budget and on schedule
B. Schedule Variance Index is 1
C. There is no schedule variance
D. There is no cost variance
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2. _____________ is not part of the
Earned Value calculations.
A. Known Unknowns
B. Unknown Unknowns
C. Project Budget
D. Amount of work completed
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3. A Project with a total funding of
$100,000 finished with a BAC value of
$95,000. What term can BEST describe the
difference of $5,000?
A. Cost Variance
B. Management Overhead
C. Management Contingency Reserve
D. Schedule Variance
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4. Reserve Analysis a technique
NOT used in:
A. Estimate Costs
B. Determine Budget
C. Control Costs
D. Estimate Activity Duration
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5. Project Cost Management Plan
is created as a part of:
A. Develop Project Management Plan process
B. Estimate Costs process
C. Determine Budget process
D. Control Costs process
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6. A particular project in the domain of civil
construction requires that every on-site worker be
insured. Which of the following inputs BEST conveys
this requirement to the Estimate Costs process so that
the insurance cost is estimated and subsequently
budgeted:
A. Enterprise Environmental Factor
B. Organizational Process Assets
C. Project Scope Statement
D. Project Management Plan
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7. ____________ is not a part of the
project cost baseline but is
included in the project budget:
A.Activity Cost Contingency Reserve
B. Management Contingency Reserve
C. Management Overheads
D. Project Management Planning
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8. What is the BEST way to make an accurate
forecasting of ETC?
A) Manual Forecasting of cost of remaining work.
B) BAC – EV
C) (BAC – EV)/CPI
D) EAC - AC
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9. If the Earned Value is equal to
Actual Cost, it means:
A. Project is on budget and on schedule
B. Schedule Variance Index is 1
C. There is no schedule variance
D. There is no cost variance
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10. Trend Analysis is BEST
described as:
A. Analyzing performance of similar projects over time
B. Examining project performance over time
C. Calculating Earned Value
D. Calculating Cost Variance
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The Results