Project cost management

Planning, estimating, budgeting, financing, funding managing and controlling project costs.

1. Plan cost management
2. Estimate costs
3. Determine budget
4. Control costs

The PDCA for Project cost management

Emerging trends 

• Expansion of Earned Value Management
  • Traditionally Schedule Variance (SV) = Earned Value (EV) – Planned Value (PV)
  • New :  Schedule Variance (SV) = Earned Schedule (ES) – Actual Time (AT)
  • Schedule Performance Index (SPI) = ES/AT
  • This indicates the efficiency with which work is completed
  • Rolling wave planning for Agile projects
  • Ability to negotiate on the scope for projects where cost is strictly controlled

Cost management plan 

• How the project costs will be planned, structured and controlled?
• Cost management processes used
• Cost management tools&techniques  used
• Units of measure
• Level of precision
• Level of accuracy
• Organizational procedure
• Control thresholds
• Rules of performance measurement
  • Rule of credit
    • 0-100
    • 50-50
    • % complete
    • Milestone related credits
• Reporting formats

Accuracy of estimates 

• Initiation phase -> Rough order of magnitude estimate (ROM) ( -25% to +75%)
• Planning phase -> Definitive estimates (-5% to +10%)

Scope baseline 

• Project scope statement 
• Work breakdown structure (WBS)
• WBS dictionary

Tools & Techniques for Cost estimation 

• Expert judgment – Expertise of the estimator
• Analogous estimation – Comparing with a past similar activity
• Parametric estimation – Average / application of statistical methods over multiple similar incidents
• Bottom up estimation – Estimating at the activity level, then rolling up to the work package level and then to the project level
• Three point estimate 
  • Most likely (cM)
  • Optimistic (cO)
  • Pessimistic (cP)
• Triangular distribution  cE = (cO+cM+cP) / 3
• Beta distribution cE = (cO+4cM+cP)/6

Cost of Quality (COQ) = Price of conformance (POC) + Price of non conformance (PONC)

Price of conformance (POC)  is the total cost of activities performed to prevent problems from happening (Process definition, training, checklists etc). Price of non conformance (PONC) is the money lost due to rework, penalties paid etc.

Funding limit reconciliation 

• When the foundation is completed, we can assume that 20% of the project work is completed. The funds allocated for the foundation work of the project should not be more than 20% of the overall project funding

Financing of projects refers to acquiring funding for the project

Cost baseline – Approved version of the time-phased budget of the project

Cost baseline + Management reserves = Project budget 

 

Earned Value Analysis (EVA)

• Planned value (PV) = Budgeted Cost of Work Scheduled  (BCWS)
• Earned value (EV) = Budgeted Cost of Work Performed (BCWP)
• Actual cost (AC) = Actual cost Cost of Work Performed (ACWP)
  • Cost Variance (CV) = EV – AC
  • Cost Performance Index (CPI) = EV / AC
  • Schedule Variance (SV) = EV – PV
  • Schedule Performance Index (SPI) = EV/AC
  • Variance at Completion (VAC) = Budget at Completion (BAC) – Estimate at Completion (EAC)
  • Estimate at Completion = AC + (BAC – EV)
  • Estimate at Completion = AC + (BAC – EV)/CPI (if the nature of work remains same and the conditions remain the same)
  • EAC forecast considering both SPI and CPI
    • EAC = AC + (BAC – EV) / (CPI x SPI)
  • Reserve analysis is performed to monitor the status of contingency and management reserves
• To Complete Performance Index (TCPI) = (BAC-EV) / (BAC-AC)
• It is the measure of CPI to be achieved to complete the project within the budget