A Guide to the PROJECT MANAGEMENT BODY OF KNOWLEDGE (PMBOK GUIDE ) Sixth edition Chapter 7 Project Cost Management PMBOK is a registered mark of the Project Management Institute, Inc Slide # 1 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 1 Project Cost Management. *Project Cost Management includes the processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so the project can be completed within the approved budget. Slide 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 2
General Concepts General Concepts Topic Fixed Cost Description A cost that does not change with an increase or decrease in the amount of goods or services produced. Variable Cost Direct Cost Costs that vary depending on a company's production volume; they rise as production increases and fall as production decreases A price that can be completely attributed to the production of specific goods or services. Indirect Cost Costs that are not directly accountable to a cost object (such as a particular project, facility, function or product). Slide # 3 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 3 Topic Sunk Cost Description In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered. Lifecycle Cost Opportunity Cost The process of identifying and documenting all the costs involved over the life of an asset is known as Life Cycle Costing (LCC). The loss of other (highest) alternatives when one alternative is chosen. Slide # 4 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 4
General Concepts Topic Value Engineering Description Value engineering (VE) is a systematic method to improve the "value" of goods or products and services by using an examination of function. Value, as defined, is the ratio of function to cost. Value can therefore be increased by either improving the function or reducing the cost. Cost Escalation Cost escalation is defined as changes in the cost or price of specific goods or services in a given economy over a period. Inflation In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. Slide # 5 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 5 Chapter 7 Project Cost Management 7.1 Plan Cost Management 7.2 Estimate Costs 7.3 Determine Budget 7.4 Control Costs Slide # 6 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 6
7.1 Plan Cost Management. *The process of defining how the project costs will be estimated, budgeted, managed, monitored, and controlled. Slide 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 7 7.1 Plan Cost Management (ITTO) Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Sixth Edition, Project Management Institute Inc., 2017, Fig. 7-2, Page 235. Slide # 8 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 8
7.2 Estimate Costs. The process of developing an approximation of the monetary resources needed to complete project work. Slide 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 9 7.2 Estimate Costs (ITTO) Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Sixth Edition, Project Management Institute Inc., 2017, Fig. 7-4, Page 240. Slide # 10 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 10
7.3 Determine Budget. *The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. Slide 11 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 11 7.3 Determine Budget (ITTO) Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Sixth Edition, Project Management Institute Inc., 2017, Fig. 7-6, Page 248. Slide # 12 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 12
Example: Cost Aggregation In bottom-up cost aggregation, individual activities are added up, or aggregated. Slide 13 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 13 Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Sixth Edition, Project Management Institute Inc., 2017, Fig. 7-8, Page 255. Slide 14 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 14
Cost Baseline, Expenditures, and Funding Requirements Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Sixth Edition, Project Management Institute Inc., 2017, Fig. 7-9, Page 255. Slide 15 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 15 7.4 Control Costs. *The process of monitoring the status of the project to update the project costs and manage changes to the cost baseline. Slide 16 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 16
Process 7.4 Topics covered in this process 7.4 Control Costs 5.6.1 Control Costs: Inputs 5.6.2 Control Costs: Tools and Techniques 5.6.3 Control Costs: Outputs Slide # 17 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 17 7.4 Control Costs (ITTO) Slide # 18 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 18
7.3 Control Costs - Inputs 7.3 Control Costs - Inputs Inputs 1 Project Management Plan 2 Project Documents Relevance Cost management plan, cost baseline and performance measurement baseline are inputs to this process. Lessons learned register. 3 Project Funding Requirements The project funding requirements are an important input into the Control Costs process because they enable you to determine when expenditures will be incurred and when funding for the project will be available and to therefore assess actual versus planned project funding requirements and control any changes to these elements. Slide # 19 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 19 Inputs 4 Work Performance Data 5 Organizational Process Assets Relevance Work performance data contains data on project status such as which activities have started, their progress (e.g., actual duration, remaining duration, and physical percent complete), and which activities have finished. The types of organizational process assets that will be useful as inputs into the Control Costs process are any existing organizational policies, procedures, templates, or any other element relating to how costs will be monitored and reported on in your project. Slide # 20 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 20
7.3 Control Costs T & T 7.3 Control Costs T & T T & T 1 Expert Judgment What is it? Examples of expert judgment during the Control Costs process include but are not limited to: 1. Variance analysis 2. Earned value analysis 3. Forecasting, and 4. Financial analysis Slide # 21 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 21 T & T 2 Data Analysis What is it? Earned Value Management. *A methodology that combines scope, schedule, and resource measurements to assess project performance and progress. EVM develops and monitors three key dimensions for each work package and control account: 1. Planned Value 2. Actual Cost 3. Earned Value Slide # 22 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 22
7.3 Control Costs T & T 7.3 Control Costs T & T T & T 2 Data Analysis What is it? Actual Cost (AC). *The realized cost incurred for the work performed on an activity during a specific time period. Planned Value (PV). *The authorized budget assigned to scheduled work. Earned Value (EV). *The measure of work performed expressed in terms of the budget authorized for that work. Earned Value is calculated using the formula. EV = % Completed x Budget Percent Completed is the progress of the work package or control account for which the progress is measured using different measurement techniques. Slide # 23 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 23 T & T Progress Measurement Techniques What is it? Each work package has its own unique characteristics; therefore, there is not one single best way to measure progress. To accommodate the different types of work, there are several accepted methods to measure work performance. There are three classes of work, as follows: 1. Discrete effort 2. Apportioned effort 3. Level of effort Slide # 24 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 24
7.3 Control Costs T & T T & T Progress Measurement Techniques What is it? Discrete Effort. * An activity that can be planned and measured and that yields a specific output. Discrete effort is directly related to specific end products or services with distinct and measurable points, and outputs that result directly from the discrete effort. The four discrete effort measurement methods are: 1. Fixed formula 2. Weighted milestone 3. Percent complete 4. Physical measurement Slide # 25 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 25 1. Fixed Formula Methods Fixed formula assigns a specified percentage of the budget value of the work package to the start milestone of the work packages. The remaining budget value percentage is assigned when the work package is completed. Another important point is to note is that this method is only used on smaller work packages that are planned to start and end within two reporting time periods. Project Management Institute, Practice Standard for Earned Value Management Second Edition, Project Management Institute Inc., 2011, Fig. 7-2, Page 37. Slide 26 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 26
2. Weighted Milestone The weighted milestone method divides the work package into measurable segments, each ending with an observable milestone; it then assigns a weighted value to the achievement of each milestone. The weighted milestone method is more suitable for longer duration work packages (i.e., those longer than two time periods) that have intermediate and tangible results, or milestones. Project Management Institute, Practice Standard for Earned Value Management Second Edition, Project Management Institute Inc., 2011, Fig. 7-3, Page 38. Slide 27 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 27 3. Percent Complete The percent complete method shows an estimate of the percentage of work that is complete at the end of each measurement period. This method should be based on objective and quantifiable work completion. The planned value is determined by the time-phased resources required to accomplish the work package. The earned value (EV) is determined by multiplying the work package BAC by the percent complete. Project Management Institute, Practice Standard for Earned Value Management Second Edition, Project Management Institute Inc., 2011, Fig. 7-4, Page 39. Slide 28 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 28
6.6 Control Schedule: T & T 4. Physical Measurement The physical measurement, unlike the weighted milestone and the percent complete, can be related more explicitly to the completion of the work. Measurement can include any units that can be explicitly related to the completion of the work. Examples may include the length of cable laid, the area and quantity of concrete poured, and the quantity of spokes in the case of the bicycle s wheel. The method of measurement and specific measurement with the cost or efforts spent should be defined and agreed upon in advance. Slide 29 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 29 T & T Progress Measurement Techniques What is it? Apportioned Effort. Apportioned effort is used for work with a direct, supportive relationship to discrete work. The value for the support task is determined based on the earned value of the referenced base activity. Apportioned effort can include such work as quality assurance, inspection, and testing activities. An apportioned work effort is estimated as a percentage of the referenced discrete work effort. The percent allocation to discrete effort is used when there are sufficient performance records and knowledge of the interrelationship between the apportioned effort and the discrete effort. Slide # 30 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 30
7.3 Control Costs T & T Apportioned Effort In this figure, the discrete effort at the second measurement point is 5,200. The apportioned effort is 10% of the discrete effort. Therefore the apportioned value at the second measurement point is 10% of 5,200 or 520. In actuality, the actual discrete effort accomplished at the end of the second period was 7,800; therefore the apportioned earned value at the second measurement point is 10% of 7,800 or 780. Project Management Institute, Practice Standard for Earned Value Management Second Edition, Project Management Institute Inc., 2011, Fig. 7-5, Page 40. Slide 31 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 31 T & T Progress Measurement Techniques What is it? Level-of-effort (LOE) activities do not directly produce definitive end products that can be delivered or measured objectively. LOE work, such as project or program management and contract management, consume project resources and should be included in the EVM Planning, Executing, and Monitoring and Controlling Process Groups. LOE is not necessarily characterized by a uniform rate of work over a period of time. A planned value is assigned to each LOE task for each measurement period, and this planned value is credited as EV at the end of the measurement period. EV is accrued in line with PV which means LOE activities will not have a schedule variance. However cost variance can be incurred because the actual cost (AC) is usually different from EV. Slide # 32 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 32
Wall 4 Wall 2 Level of Effort Earned value equal to the planned value at all measurement points. Project Management Institute, Practice Standard for Earned Value Management Second Edition, Project Management Institute Inc., 2011, Fig. 7-6, Page 41. Slide 33 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 33 Earned Value Calculation Calculate BAC, PV, AC and EV Schedule Plan Schedule: To complete the work in 4 weeks work is equally distributed Wall 1 Budgeted Cost USD 10000 / wall Status at the end of week 3 Wall 1 Progress 100% - AC $12000 Wall 2 Progress 100% - AC $13000 Wall 3 Progress 50% - AC $7000 Wall 4 Progress 0% - AC $0 Wall 3 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 34
7.3 Control Costs T & T Solution Work Package Planned Value Actual Cost Progress Earned Value Wall 1 10000 12000 100 % 10000 Wall 2 10000 13000 100 % 10000 Wall 3 10000 7000 50 % 5000 Wall 4 10000 0 0 % 0 Total 40000 32000 25000 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 35 T & T 2 Data Analysis What is it? Variance Analysis. * A technique for determining the cause and degree of difference between the baseline and actual performance. There are 4 formula to calculate variance 1. Cost Variance 2. Cost Performance Index 3. Schedule Variance 4. Schedule Performance Index 5. Variance At Completion (VAC). * A projection of the amount of budget deficit or surplus, expressed as the difference between the budget at completion and the estimate at completion. (Explained later) Slide # 36 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 36
Variance Analysis Cost Performance Cost Variance Earned Value Actual Cost Positive = Under planned cost Neutral = On planned cost Negative = Over planned cost Cost Performance Index Earned Value Actual Cost Greater than 1.0 = Under planned cost Exactly 1.0 = On planned cost Less than 1.0 = Over planned cost Schedule Performance Schedule Variance Earned Value Planned Value Positive = Ahead of Schedule Neutral = On schedule Negative = Behind Schedule Schedule Performance Index Earned Value Planned Value Greater than 1.0 = Ahead of schedule Exactly 1.0 = On schedule Less than 1.0 = Behind schedule 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 37 Cost Performance Cost Variance Cost Performance Index 25000 32000 = (7000) 25000 / 32000 = 0.781 Schedule Performance Schedule Variance Schedule Performance Index 25000 30000 = (5000) 25000 / 30000 = 0.833 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 38
7.3 Control Costs T & T T & T 2 Data Analysis What is it? Trend Analysis. An analytical technique that uses mathematical models to forecast future outcomes based on historical results. Trend analysis uses Charts and Forecasting techniques to measure project performance over time to determine if performance is improving or deteriorating. 3 PMIS (Explained in subsequent slides) PMIS is often used to generate, capture and report project performance. Slide # 39 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 39 Charts This chart uses S- curves to display EV data for a project that is performing over budget and behind the schedule. Earned Value, Planned Value, and Actual Costs Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Sixth Edition, Project Management Institute Inc., 2017, Fig. 7-12, Page 264. Slide 40 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 40
Forecasting EAC EAC BAC CPI CPI is expected to be the same for the remainder of the project EAC (BAC EV) AC + (CPI x SPI) Estimate At Completion EAC AC + (BAC EV) Future work will be accomplished at the planned rate EAC AC + Bottom up ETC CPI and SPI influence the remaining work Initial plan is no longer valid 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 41 EAC Estimate At Completion EAC 40000 0.781 = 51216 32000 + (40000 25000) = 47000 CPI is expected to be the same for the remainder of the project EAC Future work will be accomplished at the planned rate EAC 32000 + (40000 25000) (0.781 x 0.833) = 55055 32000 + Bottom up ETC CPI and SPI influence the remaining work Initial plan is no longer valid 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 42
Forecasting ETC Estimate To Complete ETC ETC EAC AC Assumes work is proceeding on plan. Re-Estimate Re-estimate the remaining work from the bottom up. 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 43 Estimate To Complete ETC ETC 51216 32000 = 19216 CPI is expected to be the same for the remainder of the project. Re-Estimate Assumes work is proceeding on plan. Re-estimate the remaining work from the bottom up. 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 44
7.3 Control Costs T & T T & T 3 To-Complete Performance Index What is it? * A measure of the cost performance that is required to be achieved with the remaining resources in order to meet a specified management goal, expressed as the ratio of the cost to finish the outstanding work to the remaining budget. TCPI To Complete Performance Index TCPI (BAC EV)/(BAC AC) The efficiency that must be maintained in order to complete on plan. (BAC EV)/(EAC AC) The efficiency that must be maintained in order to complete the current EAC. Slide # 45 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 45 TCPI To Complete Performance Index TCPI TCPI (BAC EV)/(BAC AC) (40000-25000) / (40000-32000) 1.875 (BAC EV)/(EAC AC) (40000-25000) / (51216-32000) 0.781 The efficiency that must be maintained in order to complete on plan. The efficiency that must be maintained in order to complete the current EAC. 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 46
7.3 Control Costs Outputs VAC VAC Variance At Completion BAC EAC 40000 51216 = (11216) The estimated difference in cost at the completion of the project. 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 47 Outputs 1 Work Performance Information Description The easiest way to display work performance information based on the work performance data is by using the earned value calculations for cost variance (CV), schedule variance (SV), cost performance index (CPI), schedule performance index (SPI), and the to-complete performance index (TCPI). 2 Cost Forecasts 3 Change Request 4 & 5 PMP and PD Updates EAC and ETC will be communicated to the stakeholders. Change requests may include preventive or corrective actions. Project Management Plan and Project Documents will be updated. Slide # 48 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 48
EARNED SCHEDULE Emerging Concept Earned Schedule Chapter 7 Project Cost Management PMP and PMBOK are registered marks of the Project Management Institute, Inc Slide # 49 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 49 Topic Earned Schedule Description Earned schedule (ES), developed by Lipke in 2003, extends the graphical method of projecting EV accrued onto the PV curve. The idea of Earned Schedule is similar to Earned Value. However, instead of using cost for measuring schedule performance, we would use time. Earned Schedule is determined by comparing the cumulative EV earned to the performance baseline. The time associated with EV, i.e. Earned Schedule, is found from the PV S-curve. The significance of using the Earned Schedule concept is that the associated schedule indicators behave appropriately throughout the entire period of project performance. Slide # 50 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 50
Earned Schedule Concept Schedule Variance (time) SV(t)= ES - AT Schedule Performance Index (time) SPI(t)= ES / AT Schedule Variance (time) SV(t)= 6 10 = -4 Schedule Performance Index (time) SPI(t)= 6/10 = 0.60 When the ES exceeds AT, the SV(t) is positive and negative when it lags. The SPI(t) is greater than 1.0 when ES exceeds AT, and less than 1.0 when ES is less than AT. SV(t) will only revert to zero and SPI(t) to unity at project completion when the project completes on time. Project Management Institute, Practice Standard for Earned Value Management Second Edition, Project Management Institute Inc., 2011, Fig. D1, Page 100. Slide 51 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 51 Activity 7.2 Cost Baseline Instruction Learning Outcome Format Time Limit Discussion Calculate various component of a cost baseline (BAC, PV, AC and EV). 7.2 Individual Exercise 10 Minutes 5 Minutes Slide 52 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 52
Activity 7.3 Cost Control Instruction Learning Outcome Format Time Limit Discussion Evaluate project performance using various cost control techniques. 7.3 Individual Exercise 10 Minutes 5 Minutes Slide 53 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 53 End of Seminar PMP and PMBOK are registered marks of the Project Management Institute, Inc Slide # 54 3FOLD Education Centre. All rights reserved... PMP Exam Review Slide # 54