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Project Cost Management
Knowledge Areas Major Processes desc. Primary Inputs Tools & Techniques Primary Outputs
Cost
Cost Estimating Developing an approximation of the costs of the resources needed to complete project activities 1. Enterprise environmental factors
2. Organizational Process Assets
3. Project Scope Statement
4. Work breakdown structure
5. WBS dictionary
6. Project Management Plan Schedule Management Plan Staffing Management Plan Risk Register 		1. Analogous estimating
2. Determine Resource Cost Rates
3. Bottom-up estimating
4. Parametric estimating
5. Project Management Software
6. Vendor Bid analysis
7. Reserve analysis
8. Cost of Quality 		1. Activity Cost estimates
2. Activity Cost Estimate Supporting detail
3. Requested Changes
4. Cost management plan (updates)
Cost Budgeting Aggregating the estimated costs of individual activities or work packages to establish a cost baseline. 1. Project Scope Statement
2. Work breakdown structure
3. WBS dictionary
4. Activity Cost estimates
5. Activity Cost Estimate Supporting detail
6. Project Schedule
7. Resource Calendars
8. Contract
9. Cost management plan		 1. Cost aggregation
2. Reserve Analysis
3. Parametric Estimating
4. Funding Limit reconciliation 		1. Cost baseline
2. Project funding requirements
3. Cost management plan (updates)
4. Requested Changes
Cost Control Influencing the factors that create cost variances and controlling changes to the project budget. 1. Cost baseline
2. Project funding requirements
3. Performance reports
4. Work performance information
5. Approved Change requests
6. Project management plan		 1. Cost change control system
2. Performance measurement Analysis
3. Forecasting
4. Project performance reviews
5. Project Management software
6. Variance Measurement		 1. Cost estimates (updates)
2. Cost baseline (updates)
3. Performance Measurements
4. Forecasted Completion
5. Requested Changes
6. Recommended corrective actions
7. Organization process assets (updates)
8. Project management plan (updates)
Cost Estimating
Developing an approximation (estimate) of the costs of the resources needed to complete project activities.
Cost Budgeting
Allocating the overall cost estimate to individual work activities.
Cost Control
Controlling changes to the project budget.
Resource Planning
determining what resources (people, equipment, materials) and what quantities of each should be used to perform project activities.
Life Cycle Costing
Broader view of Project Cost Management, which includes cost of resources needed to complete schedule activities along with effect of decisions on cost of using, maintaining & supporting the product, service or result of the project.
Cost Management Plan

It is created as part of the Develop Project Management Plan process. It can establish

  • Precision Level ($100, $1000 etc)
  • Units of Measure (Staff hours/days/lump sum etc)
  • Organizational Procedure Links (Control Account, code or account number directly linked accounting system)
  • Control thresholds (Agreed amount of variation allowed)
  • Earned Value rules (1.Computation Formula 2.Earned Value Credit Criteria 3.WBS Level)
  • Reporting Formats
  • Process descriptions (Each of the three cost management Processes)
ROM
Accuracy of project estimate will increase as it progresses, project at initial stages can have rough order of magnitude (ROM) in the range of –50 to +100% later it will narrow to a range of –10 to +15%.
Contingency Reserve
1.Project (known Unknowns) – Part of Cost Baseline 2.Management (Unknown Unknowns) – Part of Cost Budget
Chart of Accounts
A chart of accounts describes the coding structure used by the performing organization to report financial information in its general ledger
Analogous estimating
also called top-down estimating, means using the actual cost of a previous, similar project Parametric modeling - mathematical model to predict project costs - per square foot of living space
Parametric Estimation
It uses statistical relationship between historical data and other variables to calculate cost estimate. It can produce higher levels of accuracy depending on sophistication, resource quantity and cost data.
Bottom-up estimating
the cost of individual activities or work packages rolled up to get the estimate for whole component.
Cost baseline
The cost baseline is a time-phased budget that will be used to measure and monitor cost performance on the project. It is shown as an S curve
Funding Limit Reconciliation
Customer will set limits on disbursement of funds for the project. Funding Limit Reconciliation (TT of Cost Budgeting) will necessitate the scheduling of work to be adjusted to smooth or regulate those expenditures. It is accomplished by placing imposed date constraints for some work packages.
Project Performance Reviews (Tools and Techniques of Cost Control)
1.Variance Analysis 2.Trend Analysis 3.Earned Value Technique
EAC
Original estimating assumptions were fundamentally flawed, or that they are no longer relevant to a change in conditions. Formula: EAC = AC + ETC. Current variances are seen as atypical and the project management team expectations are that similar variances will not occur in the future. Formula: EAC = AC + BAC – EV. When current variances are seen as typical of future variances. Formula: EAC = AC + ((BAC – EV)/CPI)
Project Cost Management Processes required to ensure that the project is completed within the approved budget.
Benefit Cost Ratio Expected Revenues / Expected Costs. Measure benefits (payback) to costs; not just profits. The higher the better (if rating over 1, the benefits are greater than the costs)
Internal Rate of Return Interest Rate which makes the PV of costs equal to PV of benefits
Payback Period Number of time periods up to the point where cumulative revenues exceeds cumulative costs. Weakness in this approach is the lack of emphasis on the magnitude of the profitability. Does not account for time value of money nor consider value benefits after payback.
Opportunity Cost Cost of choosing one alternative and therefore giving up the potential benefits of another alternative: it is the value of the project not selected (lost opportunity).
Sunk Cost Expended costs which should be ignored when making decisions about whether to continue investing in a project
Law of Diminishing Returns Straight Line Depreciation The point beyond which the marginal addition of resources does not provide a proportional amount of utility. Same amount each time period (e.g. 10 – 10 – 10). Types 1. Straight Line 2. Accelerated (1. Double Declining Balance 2. Sum of Years Digits)
Contingency Reserve Separate quantity of time/money for known unknowns. Designed to cover specific risk events previously identified and measured in the Risk Management Process.
Management Reserve Separate quantity of time/money for unknown unknowns
Working Capital Current Assets - Current Liabilities
Value Analysis Cost reduction tool that considers whether function is really necessary and whether it can be provided at a lower cost without degrading performance or quality. Finding the least expensive way to do the scope of work.
Value Estimating Part of Cost Control
Value Engineering Tool Tool for analyzing a design, determining its function, and assessing how to provide those functions cost effectively.
50-50 Rule At beginning, charge 50% of its BCWS to the account. Charge remaining at completion.
Analogous Estimating Top down; based on similar projects. Represents a form of expert judgment. Gives project team an understanding of management’s expectations (part of cost budgeting and cost estimating)
Bottom-up Estimating Detailed cost estimates of work packages are aggregated. Would provide best overall quality of the estimate.
Parametric Estimating Relies on knowledge of mathematical relationships; measured in $/unit (scalable, quantifiable). It does not make use of team estimate. (part of cost budgeting and cost estimating). Using a mathematical model to predict the duration of a task (e.g. taking the average duration of all past tasks)
Regression Analysis Statistical technique graphically represented on scatter diagram
Learning Curve Mathematically models the intuitive notion that the more times we do something, the faster we will be able to perform
Variable Costs Costs rise directly with the size and scope of the project
Fixed Costs Costs do not change; non-recurring (e.g. project setup costs)
Direct Costs Incurred directly by a specific project. The PMI want the team to participate in the cost estimates to get their buy-in.
Indirect Costs Part of the overall organization's cost of doing business and are shared by all projects. Usually computed as a percentage of the direct costs.
Cost accounts Represent the basic level at which project performance is measured and reported. The purpose of cost accounts is to monitor and report on project performance.
Cost Change Control Systems Includes the documentation, tracking systems, and approval levels needed to authorize a change.
Budget updates Should be the next steps after an approved cost baseline has changed because of a major change on a project.
Operating profit Amount of money earned: Revenue – (direct + indirect costs)
Discounted cash-flow approach Present value method determines the net present value of all cash flow by discounting it by the required rate of return.
Parametric modeling Involves using project characteristics (parameters) in a mathematical model to predict project costs.
Life-Cycle Cost Provide a picture of the total cost for the product (project, operations and maintenance).
Project Closeout (output to cost control) Process and procedures developed for the closing or canceling of projects
Please see very useful formulas of cost