Project Management/Cost

Cost management is a method that uses technology to measure cost and productivity through the full life cycle of enterprise level projects. Cost management encompasses several specific functions of project management including estimating, job controls, field data collection, scheduling, accounting and design.^[1]

Objectives and Skills

Objectives and skills for the cost portion of Project+ certification include:^[2]

• Identify components of a cost management plan
  • Control limits
  • Assign costs
  • Chart of accounts
  • Project budget
  • Cost estimates (bottom up, top down, parametric, expert judgment, analogous)
  • Cost baseline
• Given a scenario, calculate and interpret the results of Earned Value Measurement (EVM)
  • EV
  • PV
  • CPI
  • SPI
  • EAC
  • ETC
  • VAC
  • BAC

Readings

1. Read Wikipedia: Project cost management.
2. Read Wikipedia: Earned value management.
3. Read Wikipedia: Cost estimate.
4. Read Wikipedia: Quality costs.
5. Read Wikipedia: Indirect cost.
6. Read Wikipedia: Variable cost.

Multimedia

1. Watch YouTube: Estimate Project Costs
2. Watch YouTube: Project Cost Management
3. Watch YouTube: Cost Estimate vs Budget
4. Watch YouTube: Obtaining Earned Value Information

Activities

1. Estimate cost of the project:
   • Cooperate with the financial department to estimate costs required for purchasing all necessary good/services and undertaking necessary activities to deliver the project.
   • Use project cost management software to develop spreadsheets and make calculations.
2. Estimate budget:
   • Use project cost management software to work in collaboration with the financial department to determine items of the budget and sources of funding and then to allocate the budget.
3. Estimate spending control:
   • Ensure that the budget allocation is optimized and costs are fully covered with the planned and allocated budget.
4. Calculate the following using the information provided: Rate of Performance is 92%, Planned Value is $200,000, and Actual Cost is $175,000:
   • Earned Value
   • Cost Variance
   • Cost Performance Index
   • Estimate At Completion
   • Estimate To Completion
   • Schedule Variance
   • Schedule Performance Index
   • Variance At Completion
5. Review the different types of estimates, and decide which is best for this project.

Lesson Summary

• Project cost management is traditionally a week area of IT projects. IT project managers must acknowledge the importance of cost management and take responsibility for understanding basic cost concepts, cost estimating, budgeting, and cost control.^[3]
• Project managers must understand several basic principles of cost management to be effective in managing project cost. Important concepts include profits and profit margins, life cycle costing, cash flow analysis, sunk cost, and learning curve theory.^[4]
• Planning cost management involves determining the policies, procedures, and documentation that will be used for planning, executing, and controlling project cost. The main output of this process is a cost management plan.^[5]
• Estimating costs is a very important part of project cost management. There are several types of cost estimates, including rough order of magnitude (ROM), budgetary, and definitive. Each type of estimate is done during different stages of the project life cycle, and each has a different level of accuracy. Several tool and techniques can help you develop cost estimates, including analogous estimating, bottom-up estimating, parametric estimating, and computerized tools.^[6]
• Determining the budget involves allocating costs to individual work items over time. It is important to understand how particular organizations prepare budgets so estimates are made accordingly.^[7]
• Controlling cost includes monitoring cost performance, reviewing changes, and notifying project stakeholders of changes related to cost. Many basic accounting and finance principles relate to cost project management. Earned value management is an important method used for measuring project performance. Earned value management integrates scope, cost, and schedule information. Project portfolio management allows organization to collect and control an entire suite of projects or investments as one set of interrelated activities.^[8]
• Several software products can assists with project cost management. Project 2010 has many cost management futures, including earned value management. Enterprise project management software and portfolio management software can help mangers evaluate data on multiple project.^[9]

Key Terms

actual cost (AC)

In calculating actual or landed cost, all expenses incurred in acquiring an item are added to the cost of items in order to establish what the goods actually cost.^[10]

analogous estimates

Using the cost of similar project to determine the cost of the current project.^[11] Also called Top-down Estimate.

baseline

A single work product, or set of work products that can be used as a logical basis for comparison.^[12]

bottom-up estimate

Using the lowest level of work package detail and summarizing the cost associated with it. Then rolling it up to a higher level aimed and calculating the entire cost of the project.^[13]

budget at completion (BAC)

The total planned value (PV) at the end of the project.^[14]

budgetary estimate

The approximation of the cost of a program, project, or operation.^[15]

cash flow analysis

To determine a project's rate of return or value.^[16]

contingency reserves

Costs that will probably occur based on past experience, but with some uncertainty regarding the amount.^[17]

cost baseline

Aggregating the estimated costs of resources, work packages and activities.^[18]

cost of quality (COQ)

A means to quantify the total cost of quality-related efforts and deficiencies.^[19]

cost performance index (CPI)

The ratio of the earned value over the cost of a project. Calculated as CPI = EV / AC.^[20]

cost variance (CV)

The difference between the earned value and the cost of a project. Calculated as CV = EV - AC.^[21]

definitive estimate

Prepared from fully designed plans and specifications.^[22]

direct costs

Costs that are directly attributable to the object.^[23]

earned value (EV)

The budgeted cost of work that has actually been performed in carrying out a scheduled task during a specific time period. Also called budgeted cost of work performed. Calculated as EV = PV * RP.^[24]

earned value management

A project management technique for measuring project performance and progress in an objective manner.^[25]

estimate at completion (EAC)

EAC is the manager's projection of total cost of the project at completion. Calculated as AC + ((BAC - EV) / CPI).^[26]

estimate to complete (ETC)

ETC is the estimate to complete the remaining work of the project. Calculated as ETC = EAC - AC.^[27]

indirect costs

Costs that are not directly accountable to a cost object (such as a particular project, facility, function or product).^[28]

intangible costs or benefits

A benefit that does not have a physical nature.^[29]

known unknowns

Risks the estimator is aware of, and based on past experience, can even estimate their probable costs.^[30]

learning curve theory

For each doubling of the total quantity of items produced, costs decrease by a fixed proportion.^[31]

life cycle costing

Total cost of ownership over the life of an asset.^[32]

management reserves

Also known as reserves.

overrun

Unexpected costs incurred in excess of budgeted amounts due to an underestimation of the actual cost during budgeting.^[33]

parametric estimating

Measuring the statistical relationship between historical data and other variable or flow.^[34]

planned value (PV)

A valuation of planned work.^[35]

profit margin

A measure of profitability. It is calculated by finding the net profit as a percentage of the revenue. Profit Margin = Profit / Revenue.^[36]

profits

Revenue minus cost^[37]

project cost management

A method that uses technology to measure cost and productivity through the full life cycle of enterprise level projects.^[38]

rate of performance (RP)

The amount of work that has actually been performed in carrying out a scheduled task during a specific time period.^[39]

reserves

An amount set aside of a commodity or items that is held back from normal use to cope with unexpected events.^[40]

rough order of magnitude

Estimate of a variable whose precise value is unknown is an estimate rounded to the nearest power of ten.^[41]

Schedule Performance Index (SPI)

The ratio of earned value over planned value. Calculated as SPI = EV / PV.^[42]

schedule variance (SV)

The difference between the earned value and the planned value of a project. Calculated as SV = EV - PV.^[43]

sunk cost

A cost that has already been incurred and cannot be recovered.^[44]

tangible costs or Benefits

Are those that have a physical substance.^[45]

top-down estimates

Also called analogous estimate.

unknown unknowns

Phenomena which cannot be expected because there has been no prior experience or theoretical basis for expecting the phenomena.^[46]

variance at completion (VAC)

The difference between a budgeted cost and the actual amount. Calculated as VAC = BAC - AC.^[47]

Review Questions

1. A (an) _________________ uses the actual cost of a previous, similar project as the basis for estimating the cost of the current project.

   A analogous estimate uses the actual cost of a previous, similar project as the basis for estimating the cost of the current project.
2. __________ includes the processes required to ensure that a project team completes a project within an approved budget.

   Project cost includes the processes required to ensure that a project team completes a project within an approved budget.
3. The ___________ can be used to estimate the projected cost of completing the project.

   The cost performance index (CPI) can be used to estimate the projected cost of completing the project.
4. A cost estimation tool which involves estimating individual work items or activities and summing them to get a project total is known as a(n) _____ estimate.

   A cost estimation tool which involves estimating individual work items or activities and summing them to get a project total is known as a bottom-up estimate.
5. ___________ are most reliable when previous projects are similar in fact with current projects.

   Analogous estimates are most reliable when previous projects are similar in fact with current projects.
6. One of the main outputs of the _____ process is a cost baseline.

   One of the main outputs of the ost budgeting process is a cost baseline.
7. The ___________ are time-intensive and expensive to develop.

   The bottom-up estimates are time-intensive and expensive to develop.
8. Good Earth, a company manufacturing packaged food products, sets up its stores in Baltonia. However, a year later, the company closes the store down due to high operating costs. In such a scenario, the money spent in paying for the rent of the store in Baltonia would be an example of _____ costs.

   Good Earth, a company manufacturing packaged food products, sets up its stores in Baltonia. However, a year later, the company closes the store down due to high operating costs. In such a scenario, the money spent in paying for the rent of the store in Baltonia would be an example of sunk costs.
9. Profits may be defined as ________ minus expenditures.

   Profits may be defined as revenues minus expenditures.
10. Accountants usually define ___________ as a resource sacrificed or foregone to achieve a specific objective or something given up in exchange.

    Accountants usually define cost as a resource sacrificed or foregone to achieve a specific objective or something given up in exchange.
11. The main goal of project cost management is to complete a project within an approved __________.

    The main goal of project cost management is to complete a project within an approved budget.
12. A cost _________ is not an output of the project cost management process.

    A cost baseline is not an output of the project cost management process.
13. If a company loses $5 for every $100 in revenue for a certain product, the profit margin for that product is -____%.

    If a company loses $5 for every $100 in revenue for a certain product, the profit margin for that product is -5%.
14. _______________ reserves allow for future situations that are unpredictable.

    Management reserves allow for future situations that are unpredictable.
15. To prepare a cost estimate for a building based on its location, purpose, number of square feet, and other characteristics, you would use a ________________ technique.

    To prepare a cost estimate for a building based on its location, purpose, number of square feet, and other characteristics, you would use a parametric technique.
16. ________________ involves allocating the project cost estimate to individual material resources or work items over time.

    Project cost budgeting involves allocating the project cost estimate to individual material resources or work items over time.
17. ________________ is a project performance measurement technique that integrates scope, time, and cost data.

    Earned value management is a project performance measurement technique that integrates scope, time, and cost data.
18. ________ ________ analysis is a method for determining the estimated annual costs and benefits for a project.

    Cash flow analysis is a method for determining the estimated annual costs and benefits for a project.
19. The percentage of work actually completed multiplied by the planned cost; formerly called the budgeted cost of work performed is known as _________ __________.

    The percentage of work actually completed multiplied by the planned cost; formerly called the budgeted cost of work performed is known as earned value (EV).
20. Avoid ________ when deciding what project to invest in or continue.

    Avoid sunk costs when deciding what project to invest in or continue.

Assessments

• FlashCards: Project Management-Cost
• Quiz: Quizlet: Project Management-Cost

References

Resource type: this resource is a lesson.