Project Management: Managing Costs and Budgets PDF

# Project management: managing costs and budgets ## 1) Cost management: tools and techniques ### 1) Cost management a global approach **COST MANAGEMENT PLAN** - Unit of measure - Precision level - Level of validity - Control thresholds - Performance measurement rules - Report type - Process des...

# Project management: managing costs and budgets ## 1) Cost management: tools and techniques ### 1) Cost management a global approach **COST MANAGEMENT PLAN** - Unit of measure - Precision level - Level of validity - Control thresholds - Performance measurement rules - Report type - Process description **Cost management plan** - Precision level - Degree of rounding for each estimate - Margin of error - What is the acceptable level of error in the estimates (e.g. ±10% ) - Control threshold - Level of variation or threshold value for which corrective action is required - Report types - Predefined templates and frequencies - Process description - Describe the costs of management processes ### 2) Cost management a global approach **COST MANAGEMENT PLAN** - Unit of measure - Precision level - Level of validity - Control thresholds - Performance measurement rules - Report type - Process description **COST ESTIMATE (INPUTS)** - Scoping letter - Work Breakdown Structure - Risk management plan - Project environmental factors - HR management plan ### 3) Cost management global approach **COST MANAGEMENT PLAN** - Unit of measure - Precision level - Level of validity - Control thresholds - Performance measurement rules - Report type - Process description **COST ESTIMATE (INPUTS)** - Scoping Letter - Work Breakdown Structure - Risk management plan - Project environmental factors - HR management plan **TOOLS & TECHNIQUES** - Expert judgement - Estimation by analogy - Parametric estimation - Bottom-up estimation - Three-point estimating - Reserves analysis - Cost of quality **Cost estimates** - Scoping note - Specifies project scope and expectations - W.B.S. - Project schedule - Resources are allocated to tasks according to needs - Determinant of project costs - Risk management plan - Considers the cost of risk management **Imputs :** - Project environmental factors - Market conditions (competition, supply, bargaining power, etc.) - Published commercial information - H.R. management plan - The cost of H.R. is estimated on the basis of the WBS and the project schedule. **Tools and techniques** - Expert judgement - Estimation by analogy - Based on the experience of similar projects sharing the same parameters and measurements. - Parametric estimation - Uses statistical relationships between variables and estimates based on relevant historical data - Bottom-up estimation - We start with the smallest division of tasks and calculate the overall cost by successive aggregations. - "Three points estimate - Cf. calculating the time needed to complete a task - Reserves analysis - Budget allocated to handling responses - Cost of quality - Assumptions and expectations about quality impact cost estimates (cf. project manager's triangle) ### 4) Cost management a global approach **COST MANAGEMENT PLAN** - Unit of measure - Precision level - Level of validity - Control thresholds - Performance measurement rules - Report type - Process description **COST ESTIMATE (INPUTS)** - Scoping letter - Work Breakdown Structure - Risk management plan - Project environmental factors - HR management plan **TOOLS & TECHNIQUES** - Expert judgement - Estimation by analogy - Parametric estimation - Bottom-up estimation - Three-point estimating - Reserves analysis - Cost of quality **ESTIMATED COSTS (OUTPUTS)** - Estimated activity costs - Basis for estimates - Updating project documents **Cost estimates: outputs** - Estimated activity costs - Quantitative estimate of costs required to complete project tasks - Costs are estimated for all resources used in cost management - Estimation bases - Documents used to estimate costs must be kept so that it is possible to understand why a cost was incorrectly estimated. - Project documents must be updated regularly **COST MANAGEMENT PLAN** - Unit of measure - Precision level - Level of validity - Control thresholds - Performance measurement rules - Report type - Process description **COST ESTIMATE (INPUTS)** - Scoping letter - Work Breakdown Structure - Risk management plan - Project environmental factors - HR management plan **TOOLS & TECHNIQUES** - Expert judgement - Estimation by analogy - Parametric estimation - Bottom-up estimation - Three-point estimating - Reserves analysis - Cost of quality **ESTIMATED COSTS (OUTPUTS)** - Estimated activity costs - Basis for estimates - Updating project documents **FINAL BUDGET** - Aggregation of costs - Analysis of reserves - Judgments expert **Determining the final budget** - Cost aggregation - Follow the WBS - Reserves analysis - Must take account of estimation, management and risk-related reservations - Rely on the expertise of employees **Component of the final budget** | Components | BUDGET | | :---------- | :----------------------- | | Total | MANAGEMENT RESERVES | | Base costs | ACCOUNTANTS | | | CONTINGENT RESERVES | | | ESTIMATE COSTS | | | WORK-PACKAGES | | | RESERVE | | | CONTINGENCIES | | | ESTIMATED ACTIVITY COSTS | ## II) Definitions and concepts **Budgeting: Definitions & Concepts** - A diagram with a group of people, a calendar, a wrench and a coin under the heading "Costs related to mobilized resources" - A picture of 2 hangers under the heading "Fixed costs". - A vertical line graph under the heading "Project investment costs". **Determining the final budget** - **Fixed costs** - Costs independent of quantities produced. - For example, if you're organizing an event, room rental is a fixed cost. - **Variable costs** - Costs evolve proportionally with production level - E.g. performance-related bonuses, commissions, etc. - **Direct costs** - Costs that can be clearly attributed to a specific project - Ex. Salary of an employee assigned exclusively to the project, rental/purchase of premises and specific resources, etc. - **Indirect costs** - Costs related to resources allocated to several projects - e.g. salaries of support organization members, rental/purchase **Direct and Indirect Costs Table** | | [Column 1] | | ---- | :---------- | | 1 | Direct and Indirect costs of a project | | 2 | Direct Cost Base | | 3 | Direct Labor Costs (Salaries and Wages, Vacation, Holiday and Sick Leave) | $300,000 | | 4 | Consulting costs | $100,000 | | 5 | Total Direct Costs | $400,000 | | 6 | Indirect Cost Pool | | 7 | Clerical Services | $30,000 | | 8 | Health Insurance | $18,000 | | 9 | FICA Taxes | $26,000 | | 10 | Pension Costs | $30,000 | | 11 | Indirect Salaries | $40,000 | | 12 | Facility Rental Costs | $15,000 | | 13 | Equipment Depreciation | $5,000 | | 14 | Utilities | $3,500 | | 15 | Indirect Supplies | $2,500 | | 16 | Legal Fees | $2,000 | | 17 | Accounting Fees | $2,000 | | 18 | Total Indirect Costs | $174,000 | | 19 | Indirect Rates | | 20 | Indirect Rate Based on Direct Labor | 58.00% | | 21 | Indirect Rate Based on Total Direct Costs | 43.50% | **Sunk costs** - costs incurred definitively: they are neither reimbursable nor recoverable, whatever the means used. - Will influence the decision to enter into an expensive activity/project. - e.g. purchase of a software license **Recurring costs vs. Non-recurring costs** - Repetitive costs dependent on continuity of production (all types of frequencies) - Costs that give rise to a single expenditure **Sunk cost** - A sunk cost is an expense that cannot be recovered. - Sunk costs should not affect your decision making. - For example, if a piece of machinery was bought five years before a current project for the current project. If the machinery cannot be used now, that amount of money has already been spent and cannot be recovered. In this case, it should also not affect the company's decision on whether or not to buy a new piece of machinery. - It is like buying a ticket for a show and finding out that the show was really unbearable and you had to walk out in the middle of the show. The cost of the show is a sunk cost. - Sunk costs in a project should be forgotten. **Exercise** **Estimate the cost of the job "send 1000 letters"** - What are the fixed costs? - What are the investment costs? - What are the resource costs? **Exercise** **Estimate the cost of the job "send 1000 letters"** - **What are the fixed costs** - 2 reams of paper: 14€/u - 1000 stamps, 0.56 €/u - 1000 prints, €0.05/u - 1000 envelopes, €71.40 - Total cost: €709 - **What are the investment costs?** - Rental of technological equipment to perform the task - Total cost: €250 - **What are the resource costs?** - 83 working hours - 30 €/h TTC - Total cost: €2490 ## III) Cost control **Earned value is the most widely used performance measurement method** **Cost management process:** - A diagram showing a cycle: Resource Planning -> Cost Estimating -> Budgeting -> Cost Control - Costs are estimated using resource planning: - The estimated costs are budgeted by an organization, and the project manager controls the budget. - A project that stays within budget is usually an exception, not the rule. - A project manager has to control schedule, performance, scope, value, and resources in order to control the costs. **Resource planning** - A diagram showing steps: - (1) List the required resources - (2) Quantify the required resources - (3) Construct a resources schedule - (4) Level the resources **Resources schedule** | Activity | Description | Required resources | Required resources | Timeframe | Requirements per week | Quantity consumed per week | | -------- | ----------- | :----------------- | :--------------- | :---------- | :-------------------- | :------------------------- | | A | Scope documentation | Bob | PC, MS Office, Printer | 11/10/10 to 11/15/10 | 40 hrs | 40 hrs | | | | Dan | PC, MS Office, Printer | 11/12/10 to 11/23/10 | 40 hrs | 40 hrs | | B | Project planning | Ed | PC, MS Office, MS | | | | Project, Printer | 11/24/10 to 12/14/10 | 40 hrs | 40 hrs | | | | Frank | PC, MS Office, MS | | | | Project, Printer | 11/24/10 to 12/14/10 | 40 hrs | 40 hrs | | C | Buy materials | Gary | Wood, | | | | Nails & Screws | 12/15/10 to 2/8/11 | 40 hrs | 40 hrs | | D | Prototype design | Ian | PC, AutoCad | 12/15/10 to 14/11 | 40 hrs | 40 hrs | | | | Jake | PC, AutoCad | 12/15/10 to 14/11 | 40 hrs | 40 hrs | | | | Katie | PC, AutoCad | 12/15/10 to 14/11 | 40 hrs | 40 hrs | | E | Prototype analysis | Linda | PC, FEA software | 1/5/11 to 2/15/11 | 40 hrs | 40 hrs | | | | Mary | PC, FEA software | 1/5/11 to 2/15/11 | 40 hrs | 40 hrs | | F | Prototype | | implementation | Linda | Wood, Nails & Screws | 2/16/11 to 3/22/11 | 40 hrs | Wood: 300 ft | | | | | | | Fasteners: 100 | | | | | | | Glue: 5 lbs. | | | Mary | Wood, Nails & Screws | 2/16/11 to 3/22/11 | 40 hrs | Wood: 300 ft | | | | | | | Fasteners: 100 | G | Testing of prototype | Nancy | Tester | 3/23/11 to 4/19/11 | 40 hrs | 40 hrs | | | | Oliver | Tester | 3/23/11 to 4/19/11 | 40 hrs | 40 hrs | | H | Presenting prototype | | to customer | Pam | PC, MS PowerPoint | 4/20/11 to 5/3/11 | 40 hrs | 40 hrs | **Ressources leveling** - When the project is large and contains many resource over-allocations, resource leveling must be accomplished. - Purpose is to create a smoother distribution of resource usage. - Leveling is done by delaying or splitting tasks until the resources assigned to them are no longer over-allocated. - Before the leveling is attempted, schedule must be refined - by adding more resources - by deciding and allocating over-time policies for certain individuals - by splitting the tasks with others who are under-allocated **Leveling extends the project time.** **Eraned value method** - A project can be managed using three indicators - VP: Planned Value or CBTP(Budgeted Cost of Planned Work) which corresponds to the expected value of the work. - VA: Acquired Value or CBTE (Budgeted Cost of Work Performed) which corresponds to the value of the work performed. - CR: Real Cost or CRTE (Real Cost of Work Performed), which corresponds to the value of actual expenditure on the project. **Planned Value (PV)** - Budget plan, showing planned expenditure over the life of the project. - Budget at completion = Initial project budget. - Since the budget is allocated by phase in a project, at a given time m VP represents the quantity of work/tasks that should have been carried out (in time or money). - →SV (schedule variance) = VA – VP **Earned Value (EV)** - Budget corresponding to the work carried out, independently of the budget actually spent. - VA is often used to calculate the progress of a project. - The further the project progresses, the more the team can predict the final estimate of the budget spent(Estimate at completion - EAC). **Current costs (CA)** - The budget actually spent - Is supposed to correspond to what was budgeted in the VP and measured with the VA - The further the project progresses, the more the team can predict the final estimate of the budget spent(Estimate at completion - EAC = AC + Estimate of remaining work). - **Cost variance: CV = VA - AC** - A diagram showing a graph of cumulative costs with "Managerial reserves", "Earned Value" and "Current Costs" plotted, and "Planned Value" and "Budget at Completion" also plotted on a separate scale. - **Earned Value method (5)** **Earned Value Equations (EV)** | Item | Equation | | :--------------- | :-------------- | | PV | Planned Value | | EV | Earned Value | | AC | Actual Value | | CV | EV-AC | | SV | EV - PV | | CPI | EV/AC | | SPI | EV/PV | | EAC | (AC/EV) * Budget at completion | | ETC | EAC-AC | | VAC | Budget at Completion – EAC | **Variances** | Question on project | What metric to use? | | :------------------ | :---------------- | | How much work is planned? | PV | | How much work is done already? | EV | | How much have we spent so far? | AC | | What is the total cost of the project? | BAC | | What do we expect project cost to be now? | EAC | | What is the estimate to complete the project? | ETC | | What is the future of this project? | VAC | **Cost Control** - A diagram showing "Monitor Progress and Conduct Reviews" with "Monitor Scope" -> "Monitor Cost" -> "Monitor Schedule" -> "Monitor Resources " -> "Monitor Performance" -> "Monitor Value" - **Yes** to "Deviations?" - Analyze Issues - Take Corrective Actions - **No** to "Deviations?" - Continue Monitoring until Completion of Project - Add to Organizational Process Assets ## IV) Sources of financing **Financing sources** **Internal financing** - Cash flow operations - Voluntary contribution from team members **External financing** - State funding (local/central) - Grants (foundations, etc.) - Donations - Sponsorship - Crowd funding - Bank loan **How do you measure the benefits of a project?** | | NON-MESURABLE | MEASURABLE | | :------------------------------------ | :------------- | :--------------------- | | **FINANCIAL** | | Clearly identifiable and | | | | measurable financial impacts | | **NON-FINANCIAL** | | Non-financial but measurable | | | | impacts | | | Non-measurable | Non-financial and non-measurable | | | (or difficult to | gains | | | measure) financial | | | | impact | | ## Quality & performance - Quality can be expressed through different items: - Performance - Specific Features - Reliability - Conformance - Durability - Serviceability - Aesthetics - Image **Table: Quality** | Dimension | Description | Example: New Product Project Printer | Example: Service MIS projects for Bank | | --------------- | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | | Performance | Primary characteristics | Pages per minute | Time to process customer checks | | Features | Secondary characteristics | Multiple paper trays | Automated bill pay | | Reliability | Consistency of performance over time | Average uptime per year | Average number of processed check mistakes per year | | Durability | Useful life | Expected life of major components | Expected life of systems with respect to technology | | Serviceability | Ease of repair | Number of copies per print cartridge | Ease of obtaining information | | Aesthetics | Sound, looks, etc. | Looks; sound | Courtesy of teller | | Conformance | Conformance to specifications | IEEE specifications | Fed Reserve Specifications | | Perceived quality | Reputation on past performance | Brand name recognition | Customer service recognition | - **Quality management** - Quality Management is composed of: - quality planning - quality assurance, and - quality control. - Quality is meeting or exceeding customer expectations. - Components of quality management: - Customer satisfaction - Defect prevention - Continuous improvement - Management responsibility to provide essential resources - Defect vs. Defective ## Standart and quality ISO - **ISO (International Organization for Standardization)** - Is the world's largest developer and publisher of international standards. - A network of the national standards institutes of 162 countries, one member per country, with a central secretariat in Geneva, Switzerland, that coordinates the system. - Is a non-governmental organization that forms a bridge between the public and private sectors. **ISO Table** | Version | Description | | :------ | :---------- | | ISO 9000 | Defines the fundamentals of quality management systems and includes eight management principles | | ISO 9001 | Deals with the requirements that an organization has to fulfill in order to meet the standards and provide a model for quality assurance in design, development, production, installation, and servicing for creation of new products, services, and systems. | | ISO 9002 | Provides a model for quality assurance in production, installation, and servicing. | | ISO 9003 | Provides a model for quality assurance in final inspection and testing. | | ISO 9004 | Emphasizes quality assurance via preventive actions instead of just checking final product, system or service. | | ISO 9000-2005 | Quality management systems – Fundamentals and vocabulary | | ISO 9001:2008 | Quality management systems - Requirements | | ISO 9004:2000 | Quality management systems - Guidelines for performance improvements | | ISO 10006:2003 | Quality management - Guidelines for quality management in projects | | ISO 10007:2003 | Quality management - Guidelines for configuration management | | ISO 10012:2003 | Measurement management systems - Requirements for measurement processes and measuring equipment | | ISO/TR 10013:2001 | Guidelines for quality management system documentation | | ISO 10019:2005 | Guidelines for the selection of quality management system consultants and use of their services | **Developing a Project Quality Plan** - A diagram showing steps: - (1) Gather Input Data - (2) Analyze Data - (3) Set Quality Metrics - (4) Develop Improvement Plan **Quality assurance and control: QPA** - QPA consists of 8 distinct steps: - Establish a mission statement - Describe and prioritize accountabilities - Describe and analyze processes - Determine customer requirements - Build in customer requirements - Document processes - Establish performance monitoring - Improve **Quality control (QC) is the operational technique and activity used to fulfill quality requirements.** - QC is used to verify whether project outcomes meet acceptable quality, reflect the project scope, and satisfy stakeholders. - Tools and techniques used in QC: - Cause and effect diagrams - Run charts - Scatter diagrams - Histograms **Tools :** - **Pareto charts** - A chart that shows the frequency of different types of errors. The bars in the chart represent the frequency of each type of error, and the line represents the cumulative frequency. The 80/20 rule states that 80% of the errors are caused by 20% of the causes. - **Six sigma** - A method for improving quality by reducing variation. It is based on the idea that a process can be improved by reducing the number of defects to 3.4 defects per million opportunities. - **Process maps or Flowcharts** - A diagram that shows the steps in a process. Flowcharts are used to understand and improve processes. An example of a flowchart is given for "Doctor consultation". - **Control charts** - A graph used to track the variation in a process over time. Control charts are used to identify problems in a process before they become too serious. An example of an X-bar chart is given. - **X-Bar Charts** - A chart showing the average of a process over time. It is used to track the variation in a process over time. - EPC, Inc. manufactures 10ft 18 AWG computer power extension cords. The process standard deviation is 0.1 feet. After manufacturing 25 cords for a project, each data point is plotted on the X-bar chart. - Using the above equations and, we obtain, - UCL = = 10 + (z* 0.1/5). If z = 3-sigma, UCL = 10.06 - LCL = = 10 - (z* 0.1/5). If z = 3-sigma, UCL = 9.94 - **Control Charts What is an R-chart?** - A chart that shows the range of a process over time. It is used to track the variability in a process over time. - A diagram showing a decision tree for selecting the correct control chart. - **Statistical sampling** - Statistical sampling deals with the selection of a subset of a population in order to gain knowledge about the whole population and to predict quality outcomes of the population using statistics. - A population is the number of items from which to draw a sample. - A sample is a selection of items from which any feature of the population may be estimated. - Sampling is the easier and cheaper choice with a simpler and smaller data set to work with. Because of the smaller size of the data set, it is possible to improve the accuracy and quality of the data. - **Statistical Sampling Table** | Method | Definition | Uses | Limitations | | :------------------------- | :--------- | :---- | :---------- | | Simple Random Sampling | Every member of the population is given an equal chance | Good estimates of the population and sampling error | Need complete and accurate population | | Quota Sampling | The population is stratified by important variables, and the required quota is obtained from each stratum or level | Quick way to obtain a sample; economical | Knowledge of population is essential. Not random and therefore may be biased | | Cluster Sampling | A random sample of clusters is considered, and then all members within those clusters are examined. | Quick and easy; does not require complete population information; works well when each cluster is part of the whole population | Larger sampling error; if clusters are big, becomes very expensive; larger sample size needed to compensate for greater sampling error | | Judgment sampling | Uses deliberate choices of information and excludes any random process | For small samples from a well-understood population | Prone to bias; because the sample is small, credibility problems will surface | - **Reviews** - **Testing and** **Inspection**