Made By: Abdulrahman Al-Ghamdi

CCSW313 – CH7
Project Cost Management

The Importance of Project Cost Management

- What is Cost?
• Cost is a resource sacrificed or foregone to achieve a specific objective or
something given up in exchange.
❖ Usually measured in monetary units like dollars that must be paid to
acquire goods and services.
- What is Project Cost Management?
• Project cost management includes the processes required to ensure that the
project is completed within an approved budget.
1) Planning cost management: determining the policies, procedures, and
documentation that will be used for planning, executing, and controlling
project cost.
2) Estimating costs: developing an approximation or estimate of the costs of
the resources needed to complete a project.
3) Determining the budget: allocating the overall cost estimate to individual
work items to establish a baseline for measuring performance.
4) Controlling costs: controlling changes to the project budget.
• Types of costs and benefits
❖ Tangible costs or benefits are those costs or benefits that an organization
can easily measure in dollars.
❖ Intangible costs or benefits are costs or benefits that are difficult to
measure in monetary terms (Reputation vs staff experience).
❖ Direct costs are costs that can be directly related to producing the
products and services of the project.
❖ Indirect costs are costs that are not directly related to the products or
services of the project, but are indirectly related to performing the
project (i.e., Corp Marketing & advertising ).
❖ Sunk cost is money that has been spent in the past; when deciding what
projects to invest in or continue, you should not include sunk costs.
 Made By: Abdulrahman Al-Ghamdi
• Additional concepts
❖ Learning curve theory states that when many items are produced
repetitively, the unit cost of those items decreases in a regular pattern as
more units are produced.
❖ Reserves are dollars included in a cost estimate to mitigate cost risk by
allowing for future situations that are difficult to predict
✓ Contingency reserves allow for future situations that may be
partially planned for (sometimes called known unknowns) and
are included in the project cost baseline.
✓ Management reserves allow for future situations that are
unpredictable (sometimes called unknown unknowns).

1. Planning Cost Management

• The first step in project cost management is planning how the costs will be
managed throughout the life of the project.
❖ The project team uses expert judgment, analytical techniques, and
meetings to develop the cost management plan.
• Cost management plan includes:
1) Level of accuracy
2) Units of measure
3) Organizational procedure links
4) Control thresholds
5) Rules of performance measurement
6) Reporting formats
7) Process descriptions

2. Estimating Costs
• Types of cost estimates
• Tools and techniques for estimating costs
• Typical problems associated with IT cost estimates.
 Made By: Abdulrahman Al-Ghamdi
• Types of Cost Estimates:
1) A rough order of magnitude (ROM) estimate provides an estimate of
what a project will cost. This type of estimate is done very early in a
project or even before a project is officially started.
2) A budgetary estimate is used to allocate money into an organization’s
budget.
3) A definitive estimate provides an accurate estimate of project costs.
Definitive estimates are used for making many purchasing decisions for
which accurate estimates are required and for estimating final project
costs.
• Cost Estimation Tools and Techniques
❖ Analogous or top-down estimates
✓ Use the actual cost of a previous, similar project as the basis for
estimating the cost of the current project.
❖ Bottom-up estimates
✓ Involve estimating individual work items or activities and
summing them to get a project total.
❖ Three-point estimates
✓ Involve estimating the most likely, optimistic, and pessimistic
costs for items.
❖ Parametric estimating
✓ Uses project characteristics (parameters) in a mathematical
model to estimate project costs.
• Typical Problems with IT Cost Estimates
❖ Reasons for inaccuracies:
✓ Estimates are done too quickly.
✓ People lack estimating experience.
✓ Human beings are biased toward underestimation.
✓ Management desires accuracy.
3. Determining the Budget
• Budgeting involves allocating the project cost estimate to individual work items
over time.
• Important goal is to produce a cost baseline.
❖ Time-phased budget that project managers use to measure and monitor
cost performance.
 Made By: Abdulrahman Al-Ghamdi
4. Controlling Costs
• Activities involved in controlling project costs:
1) Monitoring cost performance
2) Ensuring that only appropriate project changes are included in a revised
cost baseline.
3) Informing project stakeholders of authorized changes to the project that
will affect costs.
• Several tools and techniques assist in project cost control.
❖ Expert judgment, data analysis, project management information
systems, and the to-complete performance index.

- Earned Value Management (EVM)

• EVM is a project performance measurement technique that integrates scope,
time, and cost data.
• Given a baseline (original plan plus approved changes), you can determine how
well the project is meeting its goals.

- Earned Value Management Terms

• The planned value (PV), formerly called the budgeted cost of work scheduled
(BCWS), also called the budget, is that portion of the approved total cost estimate
planned to be spent on an activity during a given period.
• Actual cost (AC), formerly called actual cost of work performed (ACWP), is the
total of direct and indirect costs incurred in accomplishing work on an activity
during a given period.
• The earned value (EV), formerly called the budgeted cost of work performed
(BCWP), is an estimate of the value of the physical work actually completed.

- Rate of Performance
• Rate of performance (RP) is the ratio of actual work completed to the percentage
of work planned to have been completed at any given time during the life of the
project or activity.
 Made By: Abdulrahman Al-Ghamdi
- Earned Value Management Terms
• Cost variance CV: indicates how much the project in over or under budget.
Calculated by: CV = EV-AC
❖ If CV value is positive, the project is currently under budget.
❖ If CV value is negative, the project is currently over budget.
• Schedule variance SV: indicates how much ahead or behind the schedule a
project is running.
Calculated by: SV = EV-PV
❖ If SV value is positive, the project is currently ahead of schedule.
❖ If SV value is negative, the project is currently behind schedule.
• Cost performance index CPI: is the ratio of earned value to the actual cost. It can
be used to estimate the projected cost of the completing the project. If CPI is
equal to 1 then the planned and actual cost are equal. If CPI is less than 1 then
the project is over budget. If the CPI is greater than 1 then the project is under
budget.
Calculated by: CPI = EV/AC
• Schedule performance index SPI: is the ratio of earned value to the planned
value. It can be used to estimate the projected time to complete the project. If
SPI is equal to 1 then the planned and actual time are equal. If SPI is less than 1
then the project is behind schedule. If the SPI is greater than 1 then the project
is ahead of schedule.
Calculated by: SPI = EV/PV
• BAC – Budget at Completion, the planned budget for the total job
• EAC – Estimate at Completion, what is the total job expected to cost?
• ETC – Estimate to Complete, forecasted time to complete job.
• VAC – Variance at Completion, how much over/under budget do we expect to be?
- Rules of Thumb for Earned Value Numbers
• Negative numbers for cost and schedule variance indicate problems in those
areas
• A CPI or SPI that is less than 100% indicates problems
• Problems mean the project is costing more than planned (over budget) or taking
longer than planned (behind schedule).
Made By: Abdulrahman Al-Ghamdi