Project Cost Management

Definition Project Cost Management is a group of processes required to ensure the project is completed within the approved budget. Processes There are following processes which are part of Project Cost Management. Resource Planning Cost Estimating Cost Budgeting Cost Control Resource Planning Determining physical resources needed (i.e., material, equipment, and people) and what quantities of each should be used and when they would be needed to perform project activities Cost Estimating Process of developing an approximation (or estimate) for the cost of the resources necessary to complete the project activities. There is a difference in Cost Estimating and Pricing Cost estimating: Assessing how much it will cost the organization to provide the product or service Pricing: Assessing how much the organization will charge for the product or service. Cost estimating also includes identifying and considering cost alternatives. Cost Estimating process is a part of "Project Planning Phase". (1) Cost Estimating - Inputs (1.1) Enterprise Environmental Factors: The Cost Estimating process considers: Marketplace conditions: What products, services, and results are available in the marketplace, from whom, and under what terms and conditions Commercial databases: Resource cost rate information is often available from commercial databases that track skills and human resource costs, and provide standard costs for material and equipment. (1.2) Organizational Process Assets: Existing formal and informal cost estimating-related policies, procedures, and guidelines are considered in developing the cost management plan. (1.3) Project Scope Statement: The project scope statement describes the business need,justification, requirements, and current boundaries for the project. It provides important information about project requirements that is considered during cost estimating (1.4) Work Breakdown Structure: Used to organize the cost estimates and to ensure that the cost of all identified work has been estimated. (1.5) 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. (1.6) Project Management Plan: The project management plan 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. Information like Resource requirements, Resource rates, and various Risks involved are considered while preparing cost estimate (2) Cost Estimating - Tools & Techniques (1.1) Analogous estimating : Analogous estimating is also called top-down estimating and uses the actual cost of a previous, similar project as the basis for estimating the cost of the current project. It is frequently used to estimate total project costs when there is a limited amount of detailed information about the project. Analogous estimating is a form of expert-judgment. (1.2) Determine Resource Cost Rates: The person determining the rates or the group preparing the estimates must know the unit cost rates, such as staff cost per hour and bulk material cost per cubic yard, for each resource to estimate schedule activity costs. (1.3) Bottom-up estimating : Estimating the cost of individual work items and then rolling up the costs to arrive at a project total - more accurate. (1.4) Parametric modeling : Using project characteristics (or parameters) in a mathematical model to predict costs (e.g., price per square foot). (1.5) Project Management Software: Project management software, such as cost estimating software applications, computerized spreadsheets, and simulation and statistical tools, are widely used to assist with cost estimating. (1.6) Vendor Bid Analysis: 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. (1.7) Reserve Analysis: Many cost estimators include reserves, also called contingency allowances, as costs in many schedule activity cost estimates. (1.8) Cost of Quality: Cost of quality can also be used to prepare the schedule activity cost estimate. (3) Cost Estimating - Outputs (3.1) Activity Cost estimates : Quantitative assessments of the cost of resources (e.g., units of currency or staff hours). (3.2) Activity Supporting detail: Description of estimated scope of work Documentation of the basis for the estimate Documentation of any assumptions made Range of possible results (3.3) Requested Changes: The Cost Estimating process may generate requested changes that may affect the cost management plan , activity resource requirements, and other components of the project management plan. (3.4) Cost Management Plan Update: If approved change requests result from the Cost Estimating process, then the cost management plan component of the project management plan is updated if those approved changes impact the management of costs. Cost Budgeting Allocating the value of the overall cost estimate to individual work items, in order to establish a cost baseline for measuring project performance. Cost Budgeting estimating is part of "Project Planning Phase". (1) Cost Budgeting - Input (1.1) Project Scope Statement: (1.2) Work Breakdown Structure: The project work breakdown structure (WBS) provides the relationship among all the components of the project and the project deliverables. (1.3) 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. (1.4) 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. (1.5) Activity Cost Estimate Supporting Detail (1.6) 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. (1.7) Resource Calendars (1.8) Contract: Contract information related to what products, services, or results have been purchased . and their costs . are used in developing the budget. (1.9) Cost Management Plan: The cost management plan component of the project management plan and other subsidiary plans are considered during cost budgeting. (2) Cost Budgeting - Tools & Techniques (2.1) 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. (2.2) 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 (2.3) Parametric Estimating: The parametric estimating technique involves using project characteristics (parameters) in a mathematical model to predict total project costs. (2.4) 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. (3) Cost Budgeting - Output (3.1) Cost baseline : Time phased budget that will be used to measure and monitor the cost performance of the project. (3.2) 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. (3.3) 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. (3.4) Requested Changes: The Cost Budgeting process can generate requested changes that affect the cost management plan or other components of the project management plan. Cost Control Project cost control includes:. Influencing the factors that create changes to the cost baseline Ensuring requested changes are agreed upon Managing the actual changes when and as they occur Monitoring cost performance to detect variances from the plan. Recording all appropriate changes accurately against the cost baseline Ensuring that all appropriate changes are recorded. Preventing incorrect, inappropriate, or unauthorized changes from being included. Informing the appropriate stakeholders of authorized changes. Act to bring expected costs within acceptable limits. Analyzing positive and negative variances. Cost Control process is part of "Project Controlling Phase". (1) Cost Control - Input (1.1) Cost baseline (1.2) Project Funding Requirements (1.3) Performance reports : Information on project scope and cost performance. Alert project management team to future problems. (1.4) Work Performance Information (1.5) Approved Change requests : Approved change requests from the Integrated Change Control process (Section 4.6) can include modifications to the cost terms of the contract, project scope, cost baseline, or cost management plan. (1.6) Project Management Plan: The project management plan and its cost management plan component and other subsidiary plans are considered when performing the Cost Control process. (2) Cost Control - Tools & Techniques (2.1) Cost change control system : Procedures used for making changes to the cost baseline. Paperwork Tracking system Approval levels (2.2) Performance measurement analysis: Assessment of the magnitude of any variation, the cause of the variance, and the corrective action needed. (2.3) Forecasting: Forecasting includes making estimates or predictions of conditions in the project.s future based on information and knowledge available at the time of the forecast. (2.4) Project Performance Reviews: Performance reviews compare cost performance over time, schedule activities or work packages overrunning and under running budget (planned value), milestones due, and milestones met. (2.5) Project Management Software: Project management software, such as computerized spreadsheets, is often used to monitor PV versus AC, and to forecast the effects of changes or variances. (2.6) Variance Management: The cost management plan describes how cost variances will be managed, for example, having different responses to major or minor problems. The amount of variance tends to decrease as more work is accomplished. (3) Cost Control - Outputs (3.1) Cost Estimates updates : Revised schedule activity cost estimates are modifications to the cost information used to manage the project. (3.2) Cost Baseline updates: Budget updates are changes to an approved cost baseline. (3.3) Performance Measurements: The calculated CV, SV, CPI, and SPI values for WBS components, in particular the work packages and control accounts, are documented and communicated. (3.4) Forecasted Completion: Either a calculated EAC value or a performing organization-reported EAC value is documented and the value communicated to stakeholders. Either a calculated ETC value or a reported ETC value provided by the performing organization is documented and the value communicated to stakeholders. (3.5) Requested Changes: Analysis of project performance can generate a request for a change to some aspect of the project. (3.6) Recommended Corrective Actions: Corrective action is anything done to bring expected future project performance in line with the project plan. (3.7) Organizational Process Assets updates: Lessons learned are documented so they can become part of the historical databases for both the project and the performing organization. (3.8) Project Management Plan updates: Schedule activity, work package, or planning package cost estimate, as well as the cost baseline , cost management plan, and project budget documents are components of the project management plan. All approved change requests affecting those documents are incorporated as updates to those documents. Last Moment Revision: Actual Cost (AC): AC is the total cost incurred in accomplishing work on the schedule activity or WBS component during a given time period. It is also referred as ACWP (Actual Cost of Work Performed). Budget At Completion (BAC): The estimated total cost of the project when done. Budgeted Cost of Work Performed (BCWP): The sum of the approved cost estimates for activities completed during a given period (usually project-to-date). Budgeted Cost of Work Scheduled (BCWS): The sum of the approved cost estimates for activities scheduled to be performed during a given period. Chart of Accounts: Any numbering system used to monitor project costs by category (e.g., labor, supplies, materials). The project chart of accounts is usually based upon the corporate chart of accounts of the primary performing organization. Code of Accounts: Any numbering system used to uniquely identify each element of the WBS. Contingency Reserve: A separately planned quantity used to allow for future situations which may be planned for only in part ("known unknowns"). Contingency reserves are intended to reduce the impact of missing cost or schedule objectives. Contingency reserves are normally included in the project's cost and schedule baselines. Cost Budgeting: Allocating the cost estimates to individual project components. Cost Control: Controlling changes to the project budget. Cost Estimating: Estimating the cost of the resources needed to complete project activities. Cost Performance Index (CPI): The ratio of budgeted costs to actual costs (BCWP / ACWP). CPI is often used to predict the magnitude of a possible cost overrun using the following formula: original cost estimate/CPI = projected cost at completion. If CPI is less than 1, this means that the project is over budget. Cost of Quality: Total cost for keeping the quality up to a defined standard. It includes cost like performing reviews, audits etc. Cost Variance (CV): Any difference between the estimated cost of an activity and the actual cost of that activity. In earned value, CV = BCWP-ACWP. Earned Value: A method for measuring project performance. It compares the amount of work that was planned with what was actually accomplished to determine if cost and schedule performance is as planned. Earned Value (EV) is the physical work completed to date and the authorized budget for that. It is also referred as BCWP (Budgeted Cost of Work Performed). Estimate at Completion (EAC): The expected total cost of an activity, a group of activities, or of the project when the defined scope of work has been completed. Most techniques for forecasting EAC include some adjustment of the original cost estimate based on project performance to date. EAC = Actuals-to-date + ETC. Estimate To Complete (ETC): The expected additional cost needed to complete an activity, a group of activities, or the project. Most techniques for forecasting ETC include some adjustment to the original cost estimate based on project performance to date. This is also known as Forecast Final Cost. Fixed Costs: Costs that do not change based on the number of units. These costs are nonrecurring. Life Cycle Costing: The concept of including acquisition, operating, and disposal costs when evaluating various alternatives. Also known as the total cost of ownership. Management Reserve: A separately planned quantity used to allow for future situations which are impossible to predict. ("unknown unknowns") Management reserves are intended to reduce the risk of missing cost or schedule objectives. Use of management reserves requires a change to the project's cost baseline. Parametric Estimating: An estimating technique that uses a statistical relationship between historical data and other variables to calculate an estimate. Payback Period: The number of time periods up to the point at which cumulative revenues exceed cumulative costs and, therefore, the project has turned a profit. Percent Complete (PC): The percentage of the amount of work which has been completed on an activity or group of activities. Planned Value (PV): PV is the budgeted cost for the work scheduled to be completed on an activity or WBS component up to a given point in time. It is also referred as BCWS (Budgeted Cost of Work Scheduled). Project Cost Management: A subset of project management that includes the processes required to ensure that the project is completed within the approved budget. Schedule Performance Index (SPI): The ratio of work performed to work scheduled. (BCWP / BCWS). Schedule Variance (SV): Any difference between the scheduled completion of an activity and the actual completion of that activity. In earned value, BCWP - BCWS. Value Analysis: A cost-reduction tool that involves careful analysis of a design or item to identify all the functions and the cost of each. It considers whether the function is necessary and whether it can be provided at a lower cost without degrading performance or quality. Working Capital: Current assets minus liabilities. Cost baseline refers to what is expected to be spent on the project. It is usually an S-curve. That is the expenditure is less in the beginning, and the end. The expenditure is maximum during the middle of the project. BCWS: Baseline, Scheduled or Planned Costs BCWP: Amount budgeted for the work performed ACWP: Actual Cost of Work Performed BAC: Total Budgeted Costs EAC: Estimated at Completion VAC: Variance at Completion. The difference between the total amount the project was supposed to cost (BAC) and the amount the project is now expected to cost (EAC). VAC = BAC - EAC CPI = BCWP / ACWP (measures efficiency) CV = BCWP - ACWP SPI = BCWP / BCWS (measures efficiency) SV = BCWP - BCWS Percent Complete (accomplished): BCWP / BAC (real value of work accomplished) Percent Spent: ACWP / BAC EAC = BAC / CPI or EAC = ACWP + ETC ETC = EAC - ACWP