Escolar Documentos
Profissional Documentos
Cultura Documentos
Presenter- R Masilamani
(misilamani@yahoo.com)
Objectves of Presentation
Through this interaction, participants will enhance their: Level of Knowledge and skills of project cost management Appreciation of the planning, estimating, budgeting and controlling of project costs
Understanding of the professional cost management methodologies, tools and techniques of PMBOK
The Presenter:
Mr R Masilamani PMP, collated this module Current Head of PMCE - OUM Has a Bachelor degree in Economics & Statistics and MBA in Finance and Management Has worked through employee to employer status over 35 years Has an active working, consulting and managing presence in industry
3
What is PCM?
You might think that PCM is managing the "costs" on your project The reality is that you must manage everything else that incurs cost Because if you don't, the costs will just keep on climbing Whether you like it or not!
6
of the project
span
You have to carefully manage what you do with the money available PCM is another vital function of project management that includes Resource planning Cost estimating Cost budgeting Cost control Change control
9
Is it that simple?
No, it certainly is not!
Two simple but essential principles must be clearly understood: 1. There must always be a basis for comparison 2. Only future costs can be controlled Therefore, PCM involves
Careful project planning Especially a WBS extended to the activity level Estimating the costs of the planned resources Converting that estimate to a viable control budget
First and foremost, the problem of managing project scope A lack of understanding generally that estimates are no better than just best available assessments And only as good as the data they are based on An unrealistic expectation of accuracy
The nature of PCM changes with the project life span As we'll explain later The historical view of accounting Which is not the primary focus of PCM The difficulty of getting timely cost information out of the normal accounting process The necessary data support facilities for effective PCM are not available within the organization
13
The difficulty of getting people to peer into the future, or commit themselves During progress of the actual work they feel they have more important things to do like getting the work done! Some people think you can control costs simply by turning off the money taps
Keep people on their toes Highlight misuse or wastage of resources Track budget change approvals Finish a project within approved budgets Avoid unwelcome surprises, for your corporate or financial sponsor!
15
Cost, or rather money, is simply the common denominator, or metric, for bringing together disparate types of resources I.e. accounting for use of labor, materials, equipment For management and control purposes
However, like time, money itself should not be considered as a resource unlike in corporate financial management where money is the central purpose and is treated like a commodity
17
Cost budgeting
Aggregating the estimated costs of individual schedule activities or work
Cost Control
Influencing the factors that create changes to the cost baseline
18
through answering three questions, How did we perform ? How much we differ from plan? What is the implication for future!
20
21
Cost Estimating
Enterprise Environmental Factors
Organizational Process Assets
Inputs
Outputs
Activity Cost Estimates Activity Cost Estimates Supporting Detail Requested Changes Cost Management Plan Updates
Parametric estimating
Project management software Vendor bid analysis Reserve analysis Cost of quality
Cost Estimating
Cost Budgeting
Cost Control
22
24
25
Estimating Methods
Analogous (Top Down) estimating Managers use
expert judgment or similar project costs [quick, less accurate] Bottom-Up estimating People doing work estimate based on WBS, rolled up into project estimate [slow, most accurate] Parametric estimating Use mathematical model (i.e. cost per sq ft). [accuracy varies] Two types:
Regression analysis based on analysis of multiple data points Learning Curve The first unit costs more than the 100th, forecasts efficiency gains
26
Estimating Methods
Vendor Bid Analysis Estimating using bids +
allowances for gaps in bid scope [slow, accuracy depends on gaps] Reserve Analysis Adding contingency to each activity cost estimates as zero duration item [slow, overstates cost]
27
ANALOGOUS COSTING Analogous cost estimating means using the actual cost of previous, similar projects as the basis for estimating the cost of the current project. Analogous cost estimating is frequently used to estimate costs when there is a limited amount of detailed information about the project (e.g., in the early phases). Analogous cost estimating uses expert judgment
PARAMETRIC COSTING
Parametric estimating is a technique that uses a statistical relationship between historical data and other to calculate a cost estimate for a schedule activity resource. This technique can produce higher levels of accuracy depending upon the sophistication, as well as the underlying resource quantity and cost data built into the model BOTTOM-UP COSTING This technique involves estimating the cost of individual work packages or individual schedule activities with the lowest level of detail. This detailed cost is then summarized or rolled up to higher levels for reporting and tracking purposes. The cost and accuracy of bottom-up cost estimating is typically motivated by the size and complexity of the individual schedule activity or work package. Generally, activities with associated effort increase the accuracy of the schedule activity cost estimate
28
reserves are estimated costs to be used at the discretion of the project manager to deal with anticipated, but not certain, events. These events are known unknowns and are part of the project scope and cost baselines
29
Cost Estimatin g
Cost Budgeting
Cost Control
30
Cost Budgeting
Tools & Techniques
Project Scope Statement Work Breakdown Structure WBS Dictionary Activity Cost Estimates Activity Cost Estimates Supporting Detail Project Schedule Resource Calendars Contract Cost Management Plan Requested Changes Cost aggregation Reserve analysis Parametric estimating Project Funding Requirements Cost Management Plan Updates
Outputs
Cost Baseline
Inputs
Cost Estimating
Cost Budgeting
Cost Control
31
Essential definitions
Enterprise Environmental factors-refer to both internal and external factors that surround or influence a projects success. These factors may come from any or all of the enterprises involved in the project. Enterprise environmental factors may enhance or constrain project management options and may have a positive or negative influence on the outcome. They are considered as inputs to most planning processes
Organisational process Assets- are any or all process related assets, from any or all of the
organizations involved in the project that can be used to influence the projects success. Examples include: plans, procedures, lessons learned, historical information, schedules, risk data and earned value data. Organizational Process Assets fall into two broad categoriesProcesses and Procedures, and the Corporate Knowledge Base.
WBS Dictionary-The WBS dictionary includes entries for each WBS component that briefly defines the scope or statement of the work, defines deliverables, contains a list of associated activities, and provides a list of recognized milestones to gage progress Approved change requests-refers to a change request that has been submitted by the requestors, has
been reviewed by the appropriate parties through use of the integrated change control process, and has been granted authorization to be take place
32
Essential definitions
Risk Register-The risk register or risk log becomes essential as it records identified risks, their severity, and the actions steps to be taken. It can be a simple document, spreadsheet, or a database system, but the most effective format is a table. A table presents a great deal of information in just a few pages Cost Baseline-ultimately, project management includes a variety of responsibilities within ones team in order to achieve maximum results for their employer. In regards to money and remaining in business, providing a budget that is adjusted to time is considered a cost baseline.
Performance reports- is filled out by the project manager and submitted on a regular basis to the sponsor, project portfolio management group, Project Management Office or other project oversight person or group. Earned Value Analysis-report shows specific mathematical metrics that are designed to reflect the health of the project by integrating scope, schedule, and cost information. Information can be reported for the current reporting period and on a cumulative basis.
33
Essential Definitions
Resource Calendar-Keeping track of schedules and time management is one of the most fundamentally important tasks that are the responsibility of the project management team and or the project management team leader. One of the best ways to accomplish this feat is through the careful and well orchestrated use of calendars to keep track of the multitude of project related events, occurrences, and dates that will take place during the projects life cycle.
Cost Budgeting
Budgeting is allocating costs to work packages
to establish a cost baseline to measure project performance Remember Contingency items are for unplanned but required changes it is not to cover things such as:
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 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
Reserve Analysis
Management contingency reserves are budgets reserved for unplanned, but potentially required, changes to project scope and cost. These are unknown unknowns, and the project manager must obtain approval before obligating or spending this reserve. Management contingency reserves are not a part of the project cost baseline, but are included in the budget for the project. They are not distributed as budget and, therefore, are not a part of the earned value calculations
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., one model of software development costs uses thirteen separate adjustment factors, each of which has five to seven points within it).
36
COST TYPES Sunk Costs: A historical or expended cost. Since the cost has been expended, we no longer have control over the cost. Sunk costs are not included when considering alternative courses of action.
Costs: Nonrecurring costs that do not change based on the number of units,
like expenses related to equipment required to complete a project. Variable Costs: Costs that rise directly with the size of the project, like expenses related to consumable materials used to accomplish the project.
Indirect Costs: Costs that are part of the overall organizations cost of doing
business and are shared among all the current projects. These include salaries of corporate executives, administrative expenses, any cost that would be considered part of overhead.
Opportunity Costs: The cost of choosing one alternative and, therefore, giving
up the potential benefits of another alternative. Direct Costs: Costs incurred directly by a specific project. These include cost for materials associated with the project, salary of the project staff, expenses associated with subcontractors.
37
Cost Types
Direct Costs Related Directly to the project ex. Labor hours, material, equipment, food, travel. . . Indirect Costs Overhead used for more than one project ex. Building rent, taxes, janitorial services
38
Cost Types
A cost by any other name, really isnt the same!
Variable Cost Changes with volume
TC = VC+FC
COST vs VOLUME
39
Cost Types
Project Costs
Are incurred while the project is being fulfilled.
Life Cycle Costs
Important Concepts
Sunk Costs
Forget em, theyre gone
Working Capital
- Current Assets (Cash, Inventories, Accounts Receivable) - Liabilities (Notes, AP, Accruals)
41
42
Project A has an IRR of 21% and Project B has an IRR of 14%. Which would I choose?
44
Payback Period
How long until we get the money back?
Quick and Dirty method for project selection Does not take into account the Time Value of Money
Your Project costs $50,000, and the cash flow it will bring is $11,000 a year. The Payback Period is. . . 5 years Discount rate/Interest Rate....10%
45
Payback Period
Cumulative Inflow (without discount @10%) Resulting Value of cash flow(end of year, with discount) Cumulative Inflow (with discount@10%)
Note:the two (with or without discount do not differ too much in duration 10,891 21,674 32,347 42,914 53,394 Pay-Back Period is 4yrs 8 mths.
46
Return
47
0
1 2 3
10,000
10,000 10,000 10,000
10,000
9,090 8,264 7,513
12,000
2,000 2,000 2,000
12,000
1,818 1,653 1,502
-2,000
7,272 6,611 6,011
10,000
6,830
2,000
1,366
5.464
48
Payback Period
How long until we get the money back?
Quick and Dirty method for project selection Does not take into account the Time Value of Money
Your Project costs $50,000, and the cash flow it will bring is $11,000 a year. The Payback Period is. . . 5 years
49
If Project A has a BCR of 2.2 and Project B has a BCR of 1.2, pick A.
50
Cost Control
Inputs
Cost Baseline Project Funding Requirements
Outputs
Cost Estimate Updates Cost Baseline Updates Performance Measurements Forecasted Completion Requested Changes Recommended Corrective Actions Organizational Process Assets Updates Project Management Plan Updates
Performance Reports
Work Performance Information Approved Change Requests Project Management Plan
Cost Estimating
Cost Budgeting
Cost Control
51
Earned Value
Progress is compared against the
baseline to determine whether project is ahead of or behind plan Percent complete can be difficult to measure, some managers use rules
50/50 Rule Assumed 50% complete when task started, final 50% at completion 20/80 Rule 20% at start 0/100 Rule No credit until complete
Planned Value (PV) Budgeted Cost Earned Value (EV) Actual work completed Actual Cost (AC) Costs incurred Estimate to Complete (ETC) Whats Left Estimate at Completion (EAC) What final cost will be
52
The earned value Management involves developing these key values for each schedule activity, work package, or control account:
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. Earned value (EV). EV is the budgeted amount for the work actually completed on the schedule activity or WBS component during a given time period. Actual cost (AC). AC is the total cost incurred in accomplishing work on the schedule activity or WBS component during a given time period. This AC must correspond in definition and coverage to whatever was budgeted for the PV and the EV (e.g., direct hours only, direct costs only, or all costs including indirect costs). Cost variance (CV). CV equals earned value (EV) minus actual cost (AC). The cost variance at the end of the project will be the difference between the budget at completion (BAC) and the actual amount spent. Formula: CV= EV AC
53
The earned value Management involves developing these key values for each schedule activity, work package, or control account: Schedule variance (SV). SV equals earned value (EV) minus planned value (PV). Schedule variance will ultimately equal zero when the project is completed because all of the planned values will have been earned. Formula: SV = EV - PV. These two values, the CV and SV, can be converted to efficiency indicators to reflect the cost and schedule performance of any project. Cost performance index (CPI). A CPI value less than 1.0 indicates a cost overrun of the estimates. A CPI value greater than 1.0 indicates a cost underrun of the estimates. CPI equals the ratio of the EV to the AC. The CPI is the most commonly used cost-efficiency indicator. Formula: CPI = EV/AC Schedule performance index (SPI). The SPI is used, in addition to the schedule status to predict the completion date and is sometimes used in conjunction with the CPI to forecast the project completion estimates. SPI equals the ratio of the EV to the PV. Formula: SPI = EV/PV
54
55
FORMULA NOTES
EV-AC EV-PV Negative = Over budget Positive = Under budget Negative = Behind Schedule Positive = Ahead of Schedule How much are we getting for every dollar we spend?
EV/AC
EV/PV
EAC-AC
BAC-EAC
FORMULA
NOTES
Use if no variances from BAC have occurred Use when original estimate was bad. Actuals + New estimate Use when current variances are not expected to be there in the future
57
58
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.( Forecasts are generated, updated, and reissued based on work performance information provided as the project is executed and progressed).
BAC is equal to the total PV at completion for a schedule activity, work package, control account, or other WBS component. Formula: BAC = total cumulative PV at completion. ETC is the estimate for completing the remaining work for a schedule activity, work package, or control account. ETC based on new estimate. ETC equals the revised estimate for the work remaining, as determined by the performing organization. This more accurate and comprehensive completion estimate is an independent, non-calculated estimate to complete for all the work remaining, and considers the performance or production of the resource(s) to date. Alternatively, to calculate ETC using earned value data, one of two formulas is typically used:
ETC based on atypical variances. This approach is most often used when current variances are seen as atypical and the project management team expectations are that similar variances will not occur in the future. ETC equals the BAC minus the cumulative earned value to date (EVC). Formula: ETC = (BAC - EVC)
59
FORECASTING ETC based on typical variances. This approach is most often used when current variances are seen as typical of future variances. ETC equals the BAC minus the cumulative EVC (the remaining PV) divided by the cumulative cost performance index (CPIC). Formula: ETC = (BAC EVC) / CPIC EAC is the projected or anticipated total final value for a schedule activity, WBS component, or project when the defined work of the project is completed. One EAC forecasting technique is based upon the performing organization providing an estimate at completion:
EAC using a new estimate. EAC equals the actual costs to date (ACC) plus a new ETC that is provided by the performing organization. This approach is most often used when past performance shows that the original estimating assumptions were fundamentally flawed or that they are no longer relevant due to a change in conditions. Formula: EAC = ACC + ETC
The two most common forecasting techniques for calculating EAC using earned value data are some variation of: EAC using remaining budget. EAC equals ACC plus the budget required to complete the remaining work, which is the budget at completion (BAC) minus the earned value (EV). This approach is most often used when current variances are seen as atypical and the project management team expectations are that similar variances will not occur in the future. Formula: EAC = ACC + BAC - EV EAC using CPIC. EAC equals actual costs to date (ACC) plus the budget required to complete the remaining project work, which is the BAC minus the EV, modified by a performance factor (often the CPIC). This approach is most often used when current variances are seen as typical of future variances. Formula: EAC = ACC + ((BAC - EV) / CPIC)
60
PV AC
61
Terms to Remember
Present Value Net Present Value (NPV) Internal Rate of Return (IRR) Payback Period Benefit Cost Ratio = BCR>1, Payback is greater than the cost Opportunity Cost Sunk Cost Working Capital Straight Line Depreciation Accelerated Depreciation
You wont be calculating most of these numbers on the test, just remember the concepts for general questions
62
Questions
Q1-project cost management includes all the following functions, except; a. resource planning b. cost estimating c. resource leveling d. cost budgeting d. cost control
Questions
Q3- Cost estimates may be expressed in; a. labour b. materials c. supplies d. inflation allowances e. none of the above
Questions
Q5- In the erarned value system, cost variance is computed as; a. BCWP less BCWS b. BCWP less ACWP c. ACWP less BCWP d. ACWP less BCWS e. BCWS less BCWP
Questions
Q7- if BCWS=100, BCWP=98, and ACWP=104, the project is, a. ahead of schedule b. headed for a cost overrun c. doing the business d. a and b only e. a and c only
Questions
Q9- Which of the following choices would indicate that your project was 10 percent under budget? a. BCWS=100, BCWP=110 b. ACWP=100, BCWP=110
c. BCWS=100, ACWP=110
d. ACWP=110, BCWP=100 e. BCWP=100, BCWS=110
Answers to Questions
1a 2b
6e
7-d
8-a 9-b 10 - a
3a
4c 5a
68
EVA Question
Given a lawn to be cleaned up within four days at an estimated budget
Of Rm2,000, and today after three days the status of the project being; EV=Rm1250, AC-Rm1750 with a daily planned expenditure=Rm500, calculate the following:
EV CPI SPI
CV VAC(BACETC(EAC-AC)
69
70
Big Dig
Started construction on 1991 and planned completion by 1997 (6 years), it was to cost $3 Billion, the project included 6 highways ($0.5 Billion per highway/year) At the end of the first year, 1/2 highway was completed and the cost was $2 Billion. Do the EV analysis
71
Big Dig
Megabina Sdn Bhd Started construction of skybridges in 2001 and planned completion by 2008 (8 years).They were to cost $12 Billion, the project included 8 sky-bridges ($1.5 Billion per bridge/year) At the end of the year 4 three were completed and the cost was $2.5Billion. Do the EV analysis
75
Outputs
Work performance measurements
Calculated CV, SV, CPI, and SPI values for WBS components, work packages and control accounts are documented and communicated to stakeholders
Budget forecasts
Calculated EAC value or bottomup EAC value is documented and communicated to stakeholders
Change requests (through the Perform Integrated Change Control Process) Project management plan updates
Cost performance baseline (scope, activity resources, cost estimates. Sometimes new cost baseline should be prepared as cost variance is severe) Cost management plan
References
1. Sections of this presentation were adapted from A Guide to the Project Management Body of Knowledge , Third & partly Fourth Editions, Project Management Institute Inc., 2004/9 2. it is also drawn from various other presentations, publicly uploaded 3. The presenter's expertise and Ingenuity were also employed to upgrade the original presentation
81
82