PROJ6002 Planning & Budgeting

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PROJ6002
Planning & Budgeting
Module 4
Cost Management Planning
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Project Cost Management Planning
Plan Cost Management is the process that establishes the policies, procedures, and documentation for
planning, managing, expanding, and controlling project costs. The key benefit of this process is that it
provides guidance and direction on how the project costs will be management throughout the project.
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PMBOK’s Project Cost Management
PMI (2013, p. 194)
Plans, processes, policies, procedures,
and knowledge bases specific to the
performing organisation
Conditions, usually not under the
control of the project team, that
influence, constrain, or direct the
project (in this case, contributing
to the project cost)
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Cost Estimate Tools and Techniques
PMI (2013, p. 200)
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You will be smarter tomorrow
than you are today.
Estimates Have a Life Cycle
time

+ –
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Estimating Life Cycle
• Prepare to Estimate
• Create Estimates
• Manage Estimates
• Improve Estimating Process
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Schwalbe (2012, p. 281) Australian Cost Engineering Society (2012, p. 3)
Examples of Cost Estimates and Accuracy
Larson and Gray (2011, p. 132, 140 & 141)
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Types of Cost Estimates
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Cost Estimating Techniques
e.g.
Analogous
Parametric
Three-Point
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Analogous Estimating
• Relies on the actual cost of previous, similar projects as the basis for estimating the cost of the current
project
• Used when a limited amount of detailed information about the project
• This estimating uses historical information and expert judgement
• Less costly and less time consuming, but generally less accurate
• Can be applied to a total project or to segments of a project in conjunction with other estimating methods
NASA (2015, p. C-5)
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Parametric Estimating
• Uses a mathematical model/statistical relationships to estimate project costs
• Produces higher lever of accuracy
• Still requires processes, detailed cost information and variables
• Can be costly and time consuming, especially when the project is complex and parameters are unknown
NASA (2015, p. C-3)
Example – Simple Parametric
Estimating
A labour may take 4 hours to dig a
3-ft deep ditch that is 10-ft long. It
will take 8 hours to dig a 20-ft long
ditch of the same depth. If the
labour rate for the resources is $30
per hour, the labour cost for the20-
ft ditch is $240.00.
(PMI, 2011, p. 31)
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Three-Point Estimating
• Three separate values (optimistic, pessimistic, and most likely) of the cost of the project/project elements
are required
• PERT analysis is used: E = (O + 4ML + P)/6 where E = effort, O = optimistic, ML = most likely, and P =
pessimistic
Example – Simple Three-Point Estimating
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Cost Estimating – Example
PMI (2011, p. 28)
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Cost Estimating – Example
Larson and Gray (2011, p. 147)
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Cost Estimating – Example
Schwalbe (2012, p. 287 & 289)
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Other Estimating Tools
Scenario & What-if Analysis
Sensitivity Analysis
Reserve Analysis
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Sensitivity Analysis
Sensitivity analysis is a technique used to address variations in project requirements. It is used to evaluate
the effects of changes in system parameters on the system cost. It is also used to examine variations in the
ground rules and assumptions. To perform sensitivity analysis, the following steps are suggested:
1. Compute the point estimate – fixed values, most-likely inputs
2. Select the elements for analysis – values which are likely to change e.g. inflation, discount rates, buy
quantity, expected life.
3. Determine the range of values for each element selected for analysis
4. Determine the cost impact – a range from low to high
5. Graph or table results
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Reserve Analysis
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Read the case study – The Estimate Problem
In groups, answer the following questions:
1. How many different estimating techniques were
discussed in the case?
2. If each estimate is different, how does a project
manager decide that one estimate is better than
another?
3. If you are the project manager, which estimate
would you use?
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Types of Costs
Burke (2013, pp. 236-237)
Direct costs
• Direct management
• Direct labour
• Direct material
• Direct equipment
• Direct bought-in expenses
Indirect costs (overhead costs)
• Costs that cannot be directly attributed to
any particular project, but are required to
keep the company functioning
Fixed costs – the costs are incurred even if there is
no productivity
• Rent
• Salaries
• machinery
Variable costs – the costs are associated with the
productivity
• Labour
• Material
• Utilities
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Elements of Cost (EOC)
An EOC structure can be used as a standalone approach to organising cost data. It can be used to provide
more detail for other WBS forms. Elements of cost are often aligned with the accounting system and focus
on capturing cost and other resource data at the lowest possible level. EOC may include, but not limited to:
• Labour hours
• Engineering labour hours
• Manufacturing labour hours
• Other labour hours
• Labour costs
• Engineering labour cost
• Manufacturing labour cost
• Other labour cost
• Overhead costs
• Material costs
• Subcontracts costs
• Associated costs to procurement
• Other direct charges
• Computer usage, travel, freight, consultants, remote
activities, taxes, and interdivisional support costs
• General and administrative expenses
• Legal, accounting, public relations, financial and other
administrative expenses.
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Cost-Risk Management
It is important to understand risks to ensure that resources and plans are adequate to deliver the projects
on time and within budget. Cost risk must be carefully and quantitatively assessed in developing and
presenting any cost estimate when trade studies are conducted and at confirmation reviews and authority
to proceed decision points. It is required that definitions of risk are determined prior to cost-risk analysis
and all analysis processes are directed to the organisational/project cost-risk policy.
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Best Practices for Cost-Risk Analysis
• The analysis must be transparent, traceable, defendable, and timely
• Cost and schedule baseline estimates must:
• Have a clear basis of estimate
• Include all the cost elements and schedule activities
• Be supported by relevant data
• All possible risks, threats, liens, uncertainties, mitigation strategies, and opportunities must be
explicitly quantified, including the following:
• Their probability of occurring
• Their estimated cost and/or schedule consequences
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• The analysis must address available annual resources
• The analysis must incorporate impacts of cost and schedule performance to date
• Risks must be transparently incorporate into cost, schedule, and/or both
• Product documentation/model must describe the following:
• Basis for base schedule duration and logic
• Basis for baseline cost estimates
• Risks included and basis for probability and consequences
• Risks excluded and why
Best Practices for Cost-Risk Analysis (Cont..)
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Source: NASA, 2013
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The Twelve Steps of High Quality Estimating Source: GAO, 2009

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Incorporating WBS into Cost
Estimating
Source: GAO, 2009
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PMI Estimate Management Cycle
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Cost Monitoring
Variance against Baseline estimates (Cost, Schedule and Resource plans)
Earned Value Management
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Earned Value – The Standard S-Curve
Time
Progress
2/3 Time – 3/4 Progress
1/3 Time – 1/4 Progress
How to Monitor & Control a TPM Project
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Earned Value – The Aggressive Curve
No ramp up – no learning time
Time
Progress
Plan
Actual
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Earned Value – The Curve to Avoid
About 30% of the work done
70% to 80% of the time gone by
Time
Progress
Plan
Actual
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Example – How to Measure Percent of Value Earned
 100 – 0
 0 – 100
 50 – 50
 Proportion of tasks completed
Report date
100 – 0 0 – 100
50 – 50

Work in process
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Earned Value – Cost Variance
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Earned Value – Schedule Variance
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PV-Planned Value
EV-Expected Value
AC-Actual Cost

Progress
How to Measure Earned Value
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Earned Value – The Full Story
Schedule
Variance
Cost Variance
PV
AC
EV
Time
Progress $200
$100
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Earned Value – PV, EV and AC curves
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Earned Value – Basic Performance Indices
Cost Performance Index (CPI)
A measure of how close the project is to spending on
the work performed to what was planned to have
been spent.
Schedule Performance Index (SPI)
A measure of how close the project is to
performing work as it was actually scheduled.
CPI = EV/AC
SPI = EV/PV
INDEX VALUES
< 1: over budget or behind schedule
> 1: under budget or ahead of schedule
How to Monitor & Control a TPM Project
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Example
NEWELL, M. W. G. M. N. (2003).
Project Management Question
and Answer Book. Saranac Lake:
AMACOM.
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12 Characteristics of Effective KPIs
Kerzner
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Quick Reads
• Estimating as an art–what it takes to make good art
https://www.pmi.org/learning/library/project-estimatingaccurate-labor-costs-8207
• Five keys to estimating
https://www.pmi.org/learning/library/five-keys-accurateproject-estimating-6927

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