Transcript Project Cost Management Time is Money

Project Cost Management
PMBOK 4th Edition
Agenda
 Broad
Understanding of Project Cost
Management.
 Understand how software estimation is
different.
PROCESS GROUPS
I
Planning
Estimate Costs
Budget Costs
E
Controlling
C
Control Costs
Estimate Costs

Cost estimating and Pricing:
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
Cost estimating: how much will it cost the performing
organization to provide the product or service
involved?
Pricing: how much will the performing organization
charge for the product or service? Business decision.
Estimating should be done by the person doing
the work.
Estimate Costs
Inputs
1. WBS
2. Resource
requirements
3. Resource rates.
4. Act. duration est.
5. Historical info.
6. Chart of accounts
7. Risks

Tools
1. Analogous est.
2. Parametric
modeling
3. Bottom-up est.
Outputs
1. Cost estimates
2. Cost
management plan
Based on the WBS to increase the accuracy.
 Project managers should analyze the needs of
the project, to compare and reconcile any
differences with cost requirements from
management.
Estimate Costs

Cost estimates for all resources that will be
charged to the project.



Supporting detail must include:

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
Generally expressed in units of currency to facilitate
comparisons both within and across projects.
Generally includes appropriate risk response planning.
Reference to WBS.
How it was developed?
Assumptions made.
Range of possible results.
Cost management plan how cost variances will
be managed.
Estimate Costs
 View
the Templates
 Top Down


Experience Based/Analogy
Parametric
 WBS

Roll up the numbers
Estimates vs. Accuracy
Estimate
Accuracy
Order of
Magnitude
(Early)
-25%
+75%
Budget
Estimate
-10%
+25
Definitive
Estimate
-5%
10%

Most difficult to estimate as very
little project info is available

Used to finalize the Request for
Authorization (RFA), and establish
commitment

Development stage estimate.
Needed to predict revised project
completion date
Tools for Estimating
Top Down
Estimating
Bottom Up
Estimating
Parametric
Modeling
Accuracy
depends on experience
Fast, but estimates are rough
Slow,
but reliable
High cost (time) / WBS needed
Buy-in from the team
Mathematical models to predict costs
Two types: REGRESSION ANALYSIS,
and LEARNING CURVE
Expert judgment
Delphi
Method
Tasks need not to be identified
(analogous) Considerable experience needed
Influencing Factors
 Two
sets of factors influence the ultimate
cost of a system
 Size Factors

Number, and type of functions
 Project
Factors

Project parameters that influence
project costs.
Control Costs
Inputs
1. Cost Baseline
2. Performance
Reports
3. Change Requests
4. Cost
Management
Plan

Tools
1. Cost Change
Control System
2. Performance
Measurement
3. Earned Value
Management
4. Additional
Planning
5. Computerized
Tools
Outputs
1. Revised Cost
Estimates
2. Budget Updates
3. Corrective Action
4. Estimate at
Completion
5. Project Closeout
6. Lessons learned
Understand what is driving variances, good and
bad, and decide what action to take.
Case Study
 Simple
Case study requires you to master
the following:
 EV = Earned Value
 PV = Planned Value
 AC = Actual Cost
Budget Costs

The cost baseline will be used to measure and
monitor cost performance of the project.
Expected
Cash Flow
Cumulative
Values
Cost
Baseline
Time
Control Costs
 To
Control / Report Costs
 And to Revise Costs and provide a new
Estimate At Completion
 Use Earned Value Method
Example
 Painting
your four walls.
 Each wall $1000.
 Total Budget At Completion (BAC) =
$1000+$1000+$1000+$1000
 Half way through you audit the work.
 Let us consider two scenarios.
Scenario 1
 One
Wall is painted
 Amount Spent is $500
Scenario 2
 Two
Walls painted
 Amount Spent is $4000
What is the Revised EAC
 For
Scenario 2.
TCPI
 What
if CPI is consistently low.
 Can you catch up somehow?
 How will you know if it is not possible?
 Read 18.6.1 about TCPI.
Case Study:
Project “Book Contract”
 The
“Book Contract” Project:
 10 work packages
• 10 chapters
Negotiated to be delivered 1
per month
 Estimated cost of $100 each

Time to Complete Performance
Index
(BAC)
This is equal to:
Why pick TCPI?
 The
TCPI focuses on the remaining
project activities.
 It reflects what it will take in future
performance to recover from a
negative actual cost position.
 Note: It is effectively the mirror
opposite of the cumulative CPI.
We’ve all been there.
 You’re
a few months into a project
and the first few deliverables have
been completed.
 You diligently calculate the CPI = 0.9.
 Your customer asks you about your
plans for the cost overrun
 “No problem, we’ll make it up”
 BUT CAN YOU?
Back to the Case Study..
Month
1
2
3
Planned Value
$100
$100
$100
Earned Value
$100
$100
$100
Actual Cost
$110
$110
$110
Cumulative Earned Value (EV)
$100
$200
$300
Cumulative Actual Cost (AC)
$110
$220
$330
CPI = EV/AC
0.89
0.89
0.89
TCPI calculation: Work
Remaining
 The work remaining is
BAC – EV = $1,000 - $300 = $700
 This
is an estimate of the earned
value remaining:
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

The total earned value for the project is
$1,000
We have completed 3 deliverables.
Work remaining = $700.
TCPI Calculation: Funds
Remaining
funds remaining are BAC – AC =
$1,000 – $330 = $670.
 This is the remaining budget if we are
to deliver as promised.
 The
Project Moves on
1.04
doesn’t look too bad!
We have to achieve a CPI rate of
1.04 times of what we were
working on.
 Yes, We Can!
 Yes, We Can!
 Yes, We Can!
So Three More Months &
Three more Chapters
Month
Planned Value
1
2
3
4
5
6
$100 $100 $100 $100 $100 $100
Earned Value
$100 $100 $100 $100 $100 $100
Actual Cost
$110 $110 $110 $110 $110 $110
Cumulative Earned
Value (EV)
Cumulative Actual
Cost (AC)
CPI = EV/AC
$100 $200 $300 $400 $500 $600
$110 $220 $330 $440 $550 $660
0.89
0.89
0.89
0.89
0.89
0.89
Three More Chapters …
Uphill…
To
complete the project within
budget, we now have to work at a rate
18% greater than we proposed.
In fact, we need a 29% improvement
in our expenditure rate from 89% to
118%!
TCPI Goes to ∞ in month 8!
Estimates of Cost to
Complete
The estimate of the final cost
at completion is called the
estimate at completion (EAC).
Next: The PM should
calculate the new EAC.
Analysis
 The
TCPI has the remarkable
property that if we own up to the cost
overrun and use the TCPI with the
EAC in the denominator, then we
can proceed at our current efficiency
(defined by our current CPI) and hit
the new cost target.

Conclusion
 When
BAC is no longer attainable,
the project manager should calculate
a new EAC.
 This new estimate becomes the goal
we will work towards if approved by
stakeholders.
 TCPI = (BAC –EV) / (EAC –AC)
Conclusion
 TCPI
gives us a reality check
analysis.
 PM: Our CPI is 0.9. We will
deliver on budget, don’t worry.
 Auditor: I have TCPI = 1.2,
implies 30% increase in
productivity.
 Auditor: Are you Sure?
References
 Provides
a good overview and general
guide to the principles of EVM.
 Shows the EVM role in facilitating effective
project management , Project
Management Institute, 2005
 The Two Most Useful Earned Value
Metrics: the CPI and the TCPI By Quentin
W. Fleming and Joel M. Koppelman
 Also Warburton and Kanabar – Several
PMI papers and Book