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Project Cost Management

Tesfaye Gashaw (Ph.D.)

Project Cost Management

• includes the processes involved in planning, estimating, budgeting, financing, funding, managing, and
controlling costs so that the project can be completed within the approved budget.

Estimate cost

• the process of developing an approximation of the cost of resources needed to complete project
work.

• Cost estimates include quantitative assessments of the probable costs required to complete project
work, as well as contingency amounts to account for identified risks, and management reserve to
cover unplanned work.

• Costs are estimated for all resources that will be charged to the project.

• labor, materials, equipment, services, facilities, inflation allowance, etc

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Cost estimation techniques

Expert judgment

• Experts contribute insights and opinions to estimate project costs.

• Previous similar projects; Information in the industry, discipline, and application area; and
Cost estimating methods.

• Subjective and may vary based on the experience and expertise of individuals.
• Example: Seeking input from signaling system experts to estimate costs for implementing advanced
railway signaling technology.

Analogous Estimating

• Comparing current project costs to similar past projects in terms of size or complexity.

• Utilizes values or attributes from a previous project similar to the current one.

• Example: Estimating the cost of a new rail project based on the costs of similar projects completed in
the past. 3

Parametric Estimating

• Relies on statistical relationships between historical data and variables to calculate cost
estimates.

• Accuracy depends on the sophistication and data incorporated into the model.

• Applicable to the entire project or specific project segments, in combination with other
estimating methods.
• Example: Using a parametric model to estimate track construction costs by considering factors like track length,
terrain type, and number of stations.

Bottom-Up Estimating

• Estimates individual work packages or activities in detail.

• Costs are then summarized or "rolled up" to higher levels for reporting and tracking.

• The accuracy is influenced by the size or attributes of the individual activity or work package.
• Example: Estimating the cost of laying new tracks for a railway expansion project by breaking it down
into components such as track foundation, rail installation, and signaling systems. 4

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Three-Point Estimating
• Estimating three scenarios (optimistic, pessimistic, most likely) for each activity.
• Most Likely (cM): Realistic effort assessment for the required work and predicted expenses.

• Optimistic (cO): Cost based on the best-case scenario for the activity.

• Pessimistic (cP): Cost based on the worst-case scenario for the activity.

• Averages of these estimates are used to determine the overall cost estimate.

• Triangular distribution [cE = (cO + cM + cP) / 3] and,

• Beta distribution [cE = (cO + 4cM + cP) / 6]

• Helps account for uncertainties and risks in the project.

• Example: Estimating the time and cost of upgrading an existing rail tunnel by considering optimistic
scenarios (smooth excavation), pessimistic scenarios (unforeseen geological challenges), and most likely
scenarios to calculate a weighted average.

Project Budget
• The project budget is the sum of work and planning package cost estimates, the
contingency reserve(s), and the management reserve
• Management reserve is the time or budget that management sets aside in addition to the
schedule or cost baseline.

o management reserve for unforeseen work that is within the scope of the project (for
unknown unknowns)

• contingency reserves are the budget within the cost baseline that is allocated for the identified
risks (Known unknowns)

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Figure . Project Budget Components (PMI,2017)

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Earned Value Management (EVM)

• a project management technique that integrates project scope,

schedule, and cost data to help assess project performance and

progress.

• Monitors three key dimensions for each work package :

• Planned value,

• Earned value, and

• Actual cost
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EVM can be used to answer questions that are critical to the success of every project,

such as:

 Are we delivering more or less work than planned?

 When is the project likely to be completed?

 Are we currently over or under budget?

 What is the remaining work likely to cost?

 What is the entire project likely to cost?

 How much will the project be over or under budget at the end of the project?

 How much effort is required to complete the project?

Project and Budget Performance

EVM develops and monitors three key dimensions for each work package

• Planned Value (PV):

o also known as Budgeted Cost of Work Scheduled (BCWS)

o the authorized budget assigned to scheduled work

o Defines the physical work that should have been accomplished.

o The total PV for the project is referred to as budget at completion (BAC).

• Earned Value (EV)

o Budgeted Cost of Work Performed (BCWP)

o the measure of the work performed, expressed in terms of the budget authorized for that work

o often used to calculate the percent complete of a project

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• Actual Cost (AC):

o Actual Cost of Work Performed (ACWP)

o Realized cost incurred for work performed during a specific time period.

o the total cost incurred in accomplishing the work that the EV measured.

o No upper limit; all costs spent to achieve EV are measured.

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Variance Analysis

Schedule Variance (SV):

• Measures schedule performance as the difference between earned value and planned value

• SV = EV – PV

• It answers the following questions related to time performance:

o Is the amount of work performed more or less than planned to date?

o Was more or less time spent than planned based on the amount of work accomplished?

o How much more or less time was spent than planned?

• When SV is negative, the work is behind schedule , SV is positive, the work is ahead of schedule

• SV% = SV/PV = amount of work variance / planned value 12

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Cost Variance (CV):

• Measures budget deficit or surplus at a given point (CV = EV – AC).

• answers the following questions related to cost performance:

o Are we spending more or less than budgeted for the work done?

o How much more or less are we spending?

• CV < 0, the work accomplished is costing more than planned.

• CV > 0, the work is costing less than planned

• CV% = CV/EV

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Performance Indices
Schedule Performance Index (SPI):
• Measures schedule efficiency (SPI = EV/PV).

• For example, SPI = 0.6 means that,

o on average, for every unit of time where 1 unit of work should have been accomplished, only 0.6 units of
work was actually accomplished.

o The actual work rate is only 60% of what was planned in the baseline; therefore, the work is getting done
slower at a 60% rate.

• SPI<1.0 indicates less work completed than planned (behind schedule);

• SPI>1.0 indicates more work completed (ahead of schedule)

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Cost Performance Index (CPI):

• Measures cost efficiency (CPI = EV/AC).

• CPI measures how much work is being produced for each unit of cost incurred.

• For example, when CPI = 0.8, this means that for every 1 unit of cost incurred, only 0.8 of

work was accomplished

• When cost and budget are measured in monetary value, then for each $1 spent on

average, only $0.80 of work was produced (over budget).

• CPI< 1.0 indicates a cost overrun;

• CPI>1.0 indicates a cost underrun.

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Forecasting
• Project teams develop a forecast for the Estimate at Completion (EAC) based on project performance.

• If Budget at Completion (BAC) is no longer viable, the project manager considers the forecasted EAC.

• Involves making projections of future conditions and events based on current performance information.

• Estimate to complete (ETC) is the expected cost or time needed to complete all of the
remaining work
ETC= EAC-AC

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Estimate at completion (EAC)

EAC is the expected total cost or time of a work package, or project when the defined scope of
work will be completed

 Scenario 1:If the initial plan is no longer valid:

• Builds upon actual costs and experience for completed work.

• Requires a new estimate to complete the remaining project work.

• Typically based on actual costs for completed work plus an Estimate to Complete (ETC) for the remaining work

• EAC = AC + Bottom-up ETC.

 Scenario 2: EAC Forecast for ETC work performed at the budgeted rate:
• Accepts actual project performance to date and predicts all future ETC work at the budgeted rate.

• EAC = AC + (BAC – EV).

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 Scenario 3: EAC Forecast for ETC work performed at the present CPI:
• Assumes project's past performance continues in the future.

• ETC work performed at the same cumulative Cost Performance Index (CPI) as incurred by the project.

• EAC = BAC / CPI.

Scenario 4: EAC Forecast for ETC work considering both SPI and CPI factors:
• EAC = AC + [(BAC – EV) / (CPI × SPI)].

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

• VAC= BAC − EAC

• VAC% = VAC/ BAC

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To-Complete Performance Index (TCPI)

• TCPI = the amount of work remaining / amount of budget remaining.

• TCPI measures how much work needs to be produced in the future for every unit of

cost spent, so that the work is completed on budget (assuming there is still budget

available; therefore BAC > AC).

• TCPI= (BAC − EV) / (BAC − AC)

• When EAC is cost target:

• TCPI= (BAC − EV) / (EAC − AC)

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Figure . Earned Value, Planned Value, and Actual Costs

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Example

Figure . Work Plan—Gantt (Bar) Chart (Assefa A., 2017)

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Figure . Work Plan and Status for Project Z (As of April 30) 22

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Figure. Cumulative Planned Value, Earned Value, and Actual Cost for Project Z(As of April 30)
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Exercise:
1. As the project manager overseeing a critical railway infrastructure development project with a budget
of $1.2 million , you have two specialized teams working for eight months, contributing a total of
15,000 labor hours. According to the project schedule, your team should have completed 45% of the
planned work by now. However, the current project status indicates a 42% completion rate, with 55%
of the budget already expended. Calculate EV, PV, CV, CPI, SV, and SPI. Additionally, provide insights
into the project's financial and schedule performance based on the calculated metrics.

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