Project Cost Management. Neeraj Sharma Nishma Bajracharya Prasansa Shrestha Sajeeb Chand. What is Cost and Project Cost Management ? . Cost is a resource sacrificed or foregone to achieve a specific objective or something given up in exchange
Project Cost Management • Neeraj Sharma • Nishma Bajracharya • Prasansa Shrestha • Sajeeb Chand
What is Cost and ProjectCostManagement? • Cost is a resource sacrificed or foregone to achieve a specific objective or something given up in exchange • Costs are usually measured in monetary units like Rupees, dollars • Project cost management includes the processes required to ensure that the project is completed within an approved budget .It is also called life –cycle cost. • Project managers must make sure their projects are well defined, have accurate time and cost estimates and have a realistic budget that they were involved in approving
Project Cost Management • preliminary concern with the cost of the resources needed to complete schedule activities. • Consider the effect of project decisions on the cost of using, maintaining and supporting the product, service or result of the project. • Considers the information requirements of the project stakeholders
CostManagement Plan • A cost management plan is a document that describes how the organization will manage cost variance on the project • For example, how to respond to proposals from suppliers that are higher or lower than estimates • A large percentage of total project costs are often labor costs, so project managers must develop and track estimates for labor • Many organizations estimate the number of people or hours they need by department or skill over the life cycle of a project
Cost management plan can be establish as: • Precision level • Units of measure • Organizational procedures links • Control thresholds • Earned value rules • Reporting formats • Process description
ProjectCostManagement Processes There are three projectcostmanagement processes: • Cost estimating: developing an approximation or estimate of the costs of the resources needed to complete a project • Cost budgeting: allocating the overall cost estimate to individual work items to establish a baseline for measuring performance • Cost control: controlling changes to the project budget
Cost Estimating • Cost estimating: developing an approximation or estimate of the costs of the resources needed to complete a project • Estimating schedule activity costs involves developing an approximation of the costs of the resources needed to complete each schedule activity. • Calculate risk • Identifying and considering various costing alternatives. • Cost estimates are generally expressed in units of currency such as Rupees, Dollars, etc and also can use units of measure such as staff hours or staff days along with their cost estimates. • After developing a good resource requirements list, PMs and their teams must develop several estimates of the costs for these resources.
Cost Estimating • The accuracy of a project estimate will increase as the project progresses through the project life cycle. • A rough order of magnitude (ROM) estimate provides an estimate of what a project will cost. • Also referred to as a ballpark estimate, a guesstimate, a swag, or a broad gauge. • A project in the initial phase could have a rough order of magnitude (ROM) estimate in the range of -50 to +100 %.
Cost Estimating • A ROM estimate that actually cost $100,000 would range between $50,000 to $200,000. The accuracy range is often much wider for IT projects. • Often IT project estimates for software development are doubled because of the history of cost overruns. • Project managers must take cost estimates seriously if they want to complete projects within budget constraints. • The costs for schedule activities are estimated for all resources that will be charged to the project which is not limited to labor, materials, equipment, services, and facilities, as well as special categories such as inflation allowance or a contingency cost.
Cost Estimation Inputs • Enterprise Environmental Factors • Market Place conditions: Analysis of what product, services, and results are available in the market place, from whom and under what terms and conditions. • Commercial Databases: Resource cost rate information available from commercial database that tracks skills and human resource costs. • Published seller price lists
Cost Estimation Inputs • Organizational Process Assets • Cost estimating policies. Some organizations have predefined approaches to cost estimating. Where these exist, the project operates within the boundaries defined by these policies. • Cost estimating templates. Some organizations have developed templates (or a pro forma standard) The organization can continuously improve the template based on its application and usefulness in prior projects.
Cost Estimation Inputs • Historical information. Information that pertains to the project’s product or service, and is obtained from various sources within the organization, can influence the cost of the project. • Project files. One or more of the organizations involved in the project will maintain records of previous project performance that are detailed enough to aid in developing cost estimates. • Project team knowledge. Members of the project team may recall previous actual costs or cost estimates. While such recollections can be useful, they are generally far less reliable than documented performance.
Cost Estimation Inputs • Lessons learned: cost estimates obtained from previous projects that are similar in scope and size. • Project Scope Statement Describes the business need, justification, requirements, and current boundaries for the project. The project scope statement includes constraints, assumptions, and requirements. Constraints are specific factors that can limit cost estimating options. Most common constraints for many projects is a limited project budget, required delivery dates, available skilled resources, and organizational policies.
Cost Estimation Inputs • Work Breakdown Structure: • The project’s work breakdown structure (WBS) defines the total scope of the project. • WBS is often used to develop or confirm a common understanding of project scope. • WBS Dictionary The WBS dictionary (Section 18.104.22.168) and related detailed statements of work provide an identification of the deliverables and a description of the work in each WBS component required to produce each deliverable. • Project Management Plan The project management plan (Section 4.3) provides the overall plan for executing, monitoring, and controlling the project, and includes subsidiary plans that provide guidance and direction for cost management planning and control.
Cost Estimation Inputs • Schedule management plan. • Schedule activity resources and their respective duration. • Activity Resource Estimating involves determining the availability and quantities required of staff, equipment, and materiel needed to perform schedule activities. • Activity Duration Estimating involves determining the total activity time which will affect cost estimates.
Cost Estimation Inputs • Staffing management plan • when and how human resource requirements will be brought and taken off the project team. • Risk register. The cost estimator considers information on risk responses when producing cost estimates. Risks, which can be either threats or opportunities, typically have an impact on both schedule activity and project costs. As a general rule, when the project experiences a negative risk event, the cost of the project will nearly always increase, and there will be a delay in the project schedule.
Cost Estimation Tools and Techniques • Analogous or top-down estimates:use the actual cost of a previous, similar project as the basis for estimating the cost of the current project • How similar the current and previous project are determines the accuracy of the estimate. • Bottom-up estimates or Activity Based Costing : involve estimating individual work items or activities and summing them to get a project total cost. • The smaller the work items, the better the estimate but these estimates are usually time intensive and expensive to develop.
Cost Estimation Tools and Techniques • Parametric modeling: • A technique that uses a statistical relationship between historical data and other variables e.g. square footage in construction, required labor hours. • Higher lever of accuracy • Project Management Software • PM software, such as cost estimating software applications, computerized spreadsheets, and simulation and statistical tools, are used to assist with cost estimating. • Such tools can simplify the use of some cost estimating • Provides various cost estimate alternatives.
Cost Estimation Tools and Techniques • Vendor Bid Analysis • methods include vendor bid analysis and an analysis of what the project should cost. • In cases where projects are won under competitive processes, additional cost estimating work can be required of the project team to examine the price of individual deliverables, and derive a cost that supports the final total project cost.
Cost Estimation Tools and Techniques • Reserve Analysis • Many cost estimators include reserves, also called contingency allowances. • Contingency reserves-costs to be used at the discretion of the project manager to deal with anticipated, but not certain, events called “known unknowns”. • Cost of Quality • Total costs incurred by investment in preventing non standard to requirements, • Appraising the product or service for conformance to requirements, • and failing to meet requirements (rework). • Failure costs are often categorized into internal and external. • Failure costs are also called cost of poor quality.
Cost Estimating: Outputs • Activity Cost Estimates • An activity cost estimate is a quantitative assessment of the likely costs of the resources required to complete schedule activities. • Costs are estimated for all resources like labor, materials, equipment, services, facilities, information technology, and special categories such as an inflation allowance or cost contingency reserve. • Activity Cost Estimate Supporting Detail includes • Description of the schedule activity’s project scope of work • Documentation of the basis for the estimate (i.e., how it was developed) • Documentation of any constraints • Indication of the range of possible estimates
Cost Estimating: Outputs • Requested Changes The Cost Estimating process may generate requested changes (Section 22.214.171.124) that may affect the cost management plan (Chapter 7 introductory material), activity resource requirements (Section 126.96.36.199), and other components of the project management plan. Requested changes are processed for review and disposition through the Integrated Change Control process (Section 4.6). • Cost Management Plan (Updates) If approved change requests (Section 188.8.131.52) result from the Cost Estimating process, then the cost management plan component of the project management plan (Chapter 7 introductory material) is updated if those approved changes impact the management of costs.
Cost Budgeting Cost budgeting involves allocating the projectcost estimate to individual work items over time • The WBS is a required input to the cost budgeting process since it defines the work items • An important goal is to produce a cost baseline • A time-phased budget that project managers use to measure and monitor cost performance • Estimating costs for each major project activity over time provides management with a foundation for projectcost control • Cost budgeting also provides info for project funding requirements –at what points in time will the money be needed
Cost Budgeting: Inputs • Project Scope Statement Formal periodic limitations of the expenditure of project funds can be given in the project charter or contract. These funding constraints are reflected in the project scope statement, and can be due to annual funding authorizations by the buyer’s organization or other entities like government agencies. • Work Breakdown Structure The project work breakdown structure (WBS) provides the relationship among all the components of the project and the project deliverables • WBS Dictionary The WBS dictionary and related detailed statements of work provide an identification of the deliverables and a description of the work in each WBS component required to produce each deliverable.
Cost Budgeting: Inputs • Activity Cost Estimates The cost estimates for each schedule activity within a work package are aggregated to obtain a cost estimate for each work package. • Activity Cost Estimate Supporting Detail The amount and type of additional details supporting the schedule activity cost estimate vary by application area. Regardless of the level of detail, the supporting documentation should provide a clear, professional, and complete picture by which the cost estimate was derived.
Cost Budgeting: Inputs • Project Schedule The project schedule includes planned start and finish dates for the project’s schedule activities, schedule milestones, work packages, planning packages, and control accounts. This information is used to aggregate costs to the calendar periods when the costs are planned to be incurred. • Resource Calendars A composite resource calendar for the project documents working days and nonworking days that determine those dates on which a specific resource, Whether a person or materiel, can be active or is idle.
Cost Budgeting: Inputs • Contract Contract information related to what products, services, or results have been purchased — and their costs — are used in developing the budget. • Cost Management Plan The cost management plan component of the project management plan and other subsidiary plans are considered during cost budgeting.
Cost Budgeting: Tools and Techniques • Cost Aggregation Schedule activity cost estimates are aggregated by work packages in accordance with the WBS. The work package cost estimates are then aggregated for the higher component levels of the WBS, such as control accounts, and ultimately for the entire project. • Reserve Analysis Reserve analysis establishes contingency reserves, such as the management contingency reserve, that are allowances for unplanned, but potentially required, changes. Such changes may result from risks identified in the risk register Management contingency reserves are budgets reserved for unplanned, but potentially required, changes to project scope and cost.
Cost Budgeting: Tools and Techniques • Parametric Estimating The parametric estimating technique involves using project characteristics (parameters) in a mathematical model to predict total project costs. Models can be simple (e.g., residential home construction will cost a certain amount per square foot of living space) or complex (e.g., one model of software development costs uses thirteen separate adjustment factors, each of which has five to seven points within it). Both the cost and accuracy of parametric models vary widely. They are most likely to be reliable when: • The historical information used to develop the model is accurate • The parameters used in the model are readily quantifiable • The model is scalable, such that it works for a large project as well as a small one.
Cost Budgeting: Tools and Techniques • Funding Limit Reconciliation Large variations in the periodic expenditure of funds are usually undesirable for organizational operations. Therefore, the expenditure of funds is reconciled with the funding limits set by the customer or performing organization on the disbursement of funds for the project. Reconciliation will necessitate the scheduling of work to be adjusted to smooth or regulate those expenditures.Rescheduling can impact the allocation of resources.
Cost Budgeting: Output • Cost Baseline The cost baseline is a time-phased budget that is used as a basis against which to measure, monitor, and control overall cost performance on the project. The cost baseline is a component of the project management plan. • Project Funding Requirements Funding requirements, total and periodic (e.g., annual or quarterly), are derived from the cost baseline and can be established to exceed, usually by a margin, to allow for either early progress or cost overruns. Funding usually occurs in incremental amounts that are not continuous, and, therefore, appears as a step function. The total funds required are those included in the cost baseline plus the management contingency reserve amount.
Cost Budgeting: Output • Cost Management Plan (Updates) If approved change requests result from the Cost Budgeting process, then the cost management plan component of the project management plan is updated if those approved changes impact the management of costs. • Requested Changes The Cost Budgeting process can generate requested changes that affect the cost management plan or other components of the project management plan. Requested changes are processed for review and disposition through the Integrated Change Control process.
Cost Control : Change is inevitable, success is optional • Projectcost control includes: • Monitoring cost performance • Ensuring that only appropriate project changes are included in a revised cost baseline • Recording all appropriate changes accurately against the cost baseline • Preventing incorrect, inappropriate, or unapproved changes from being • included in the reported cost or resource usage • Informing project stakeholders of authorized changes to the project that will affect costs • Acting to bring expected cost overruns within acceptable limits
Cost Control ALSO • Performance review meetings can be a powerful tool to help control project costs • Knowing you have to report on your progress is an incentive for people to perform better • Performance measurement is another important tool for cost control • There are many general accounting approaches for measuring cost performance but earned value management (EVM) unique to projectmanagement
Cost Control Project cost control searches out the causes of positive and negative variances. For example, inappropriate responses to cost variances can cause quality or schedule problems or produce an unacceptable level of risk later in the project.
Earned Value Management (EVM) • EVM is a project performance measurement technique that integrates scope, time, and cost data • Given a baseline (original plan plus approved changes), you can determine how well the project is meeting its goals • You must enter actual information periodically to use EVM • Was a WBS item completed or approximately how much of the work was completed • Actual start and end dates • Actual cost • More and more organizations around the world are using EVM to help control project costs
Best Practice • The most successful organizations are taking a holistic view of focusing, managing and measuring their organizational efforts with an integrated combination of best practice processes, training and technology • Unfortunately, most organizations today are not taking that approach