Project Cost Management.pdf

Project Cost Management Mr. Maleesha Edirisinghe MBA in Business Management [USJP], BSc in Business Management (Logistics) (Special) [NSBM] NSBM Green University 2024 What is Project Cost Management? Includes the processes involved in planning, estimating, budgeting, fina...

Project Cost Management Mr. Maleesha Edirisinghe MBA in Business Management [USJP], BSc in Business Management (Logistics) (Special) [NSBM] NSBM Green University 2024 What is Project Cost Management? Includes the processes involved in planning, estimating, budgeting, financing, funding, managing and controlling costs. Allows projects to be completed within the approved budget. Primarily concerned with the cost of the resources needed to complete project activities. Projects with high degrees of uncertainty or those where the scope is not yet fully defined may not benefit from detailed cost calculations due to frequent changes. Detailed estimates are reserved for short-term planning horizons in a just-in-time fashion. What is Project Cost Management? Project cost management includes 4 processes: 1. Plan Cost Management 2. Estimate Costs 3. Determine Budget 4. Control Costs 1. Plan Cost Management The process of defining how the project costs will be estimated, budgeted, managed, monitored and controlled. Occurs early in project planning. Cost Management Plan is a component of the Project Management Plan. 2. Estimate Costs The process of developing an approximation of the monetary resources needed to complete project work. A quantitative assessment of the likely costs for resources required to complete the activity. It is a prediction that is based on the information known at a given point in time. 2. Estimate Costs Costs are estimated for all resources that will be charged to the project. This includes labor, materials, equipment, services, facilities and special categories such as an inflation allowance and contingency costs. Cost Estimating Tools: Analogous: Comparisons of the cost estimations of previous projects similar to current project becomes the basis for estimating. Parametric: Uses a statistical relationship between relevant historical data and variables. Bottom up: Cost of individual work packages is estimated to the greatest level of specified detail and rolled up to higher levels. Three-point estimating: Uses 3 estimates (Most likely, Optimistic, Pessimistic) to define an approximate range for an activity’s cost. 3. Determine Budget The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. A project budget includes all the funds authorized to execute the project. 4. Control Costs The process of monitoring the status of the project to update the project costs and manage changes to the cost baseline. 4. Control Costs Involves analyzing the relationship between the consumption of project funds and the work being accomplished for such expenditures. Project cost control includes, Ensuring that cost expenditures do not exceed the authorized funding by period, by WBS component, by activity and in total for the project Monitoring work performance against funds expended Preventing unapproved changes from being included Informing appropriate stakeholders of all approved changes and associated cost Bringing expected cost overruns within acceptable limits  Tools and Techniques 1. Earned Value Analysis Earned Value Analysis (EVA) provides a systematic approach to monitoring and controlling projects by quantifying the value of work accomplished against the planned value and actual costs incurred. EVA is a quick way to tell if you’re behind schedule or over budget on your project. 10  Tools and Techniques 1. Earned Value Analysis Key Metrices in EVA, Planned Value (PV): This represents the approved budget for the work scheduled to be completed up to a specific point in the project timeline. Earned Value (EV): EV represents the value of the work that has been actually completed up to a specific point in the project timeline. Actual Cost (AC): AC represents the actual costs incurred to complete the work up to a specific point in the project timeline. 11  Tools and Techniques 1. Earned Value Analysis Calculations 1. Cost Performance Index (CPI) CPI measures the efficiency of cost management. A CPI greater than 1 indicates that the project is under budget, while a CPI less than 1 indicates that the project is over budget. 𝑬𝑽 CPI = 𝑨𝑪 12  Tools and Techniques 1. Earned Value Analysis Calculations 2. Schedule Performance Indicator (SPI) It measures the efficiency of schedule management. An SPI greater than 1 indicates that the project is ahead of schedule, while an SPI less than 1 indicates that the project is behind schedule. 𝑬𝑽 SPI = 𝑷𝑽 13  Tools and Techniques 1. Earned Value Analysis Calculations 3. Cost Variance (CV) A positive CV means the project is under budget, while a negative CV means its over budget. CV = EV - AC 14  Tools and Techniques 1. Earned Value Analysis Calculations 4. Schedule Variance (SV) A positive SV means the project is ahead of schedule, while a negative SV means it's behind schedule. SV = EV - PV 15  Tools and Techniques 1. Earned Value Analysis Example 01: You are the project manager on a project that has $800,000 software development effort. There are two teams of programmers that will work for six month for a total of 10,000 hours. According to the project schedule your team should be done with 38% of the work. As of today, the project is 40% complete while 50% budget has been used. Calculate and share your conclusion 16 17  Tools and Techniques 1. Earned Value Analysis Example 02: Task – Develop and install ten printer drivers. Budget - $100,000 ($10,000 per printer driver) Time – 10 weeks (1 printer driver per week) At the end of week 5: 4 printer drivers developed and installed $47,500 spent to date Calculate CPI, SPI, CV and SV 18