Project Cost Management

En.Eman Nagib, PMP, PRMG, CLAC

24/08/2022
 Cost Estimation vs. Pricing
Cost estimating:
Assessing how much it
will cost the organization
Cost
to provide the product
or service
Price
Profit
Pricing:
Assessing how much
the organization will
charge for the
product or service
PROJECT COST MANAGEMENT
Project cost management includes the processes involved
in estimating, budgeting, and controlling costs so that the
project can be completed within the approved budget

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 Project Management Process Groups

Knowledge Areas
Monitoring and Controlling Closing Process
Initiating Process Group Planning Process Group Executing Process Group
Process Group Group

4- Project Integration 4.1 Develop Project Charter 4.2 Develop Project Management Plan 4.3 Direct and Manage Project 4.5 Monitor and Control Project 4.7 Close
Management Work Work Project
4.4 Manage Project Knowledge 4.6 Perform Integrated Change
Control

5- Project Scope Management 5.1 Plan Scope Management 5.5 Validate Scope
5.2 Collect Requirements 5.6 Control Scope
5.3 Define Scope
5.4 Create WBS

6- Project Schedule 6.1 Plan Schedule Management 6.6 Control Schedule

Management 6.2 Define Activities
6.3 Sequence Activities
6.4 Estimate Activity Durations
6.5 Develop Schedule

7- Project Cost Management 7.1 Plan Cost Management 7.4 Control Costs
7.2 Estimate Costs
7.3 Determine Budget

8- Project Quality Management 8.1 Plan Quality Management 8.2 Manage Quality 8.3 Control Quality

9- Project Resource 9.1 Plan Resource Management 9.3 Acquire Resources 9.6 Control Resources
Management 9.2 Estimate Activity Resources 9.4 Develop Team
9.5 Manage Team

10- Project Communications 10.1 Plan Communications Management 10.2 Manage Communications 10.3 Monitor Communications
Management

11- Project Risk Management 11.1 Plan Risk Management 11.6 Implement Risk Responses 11.7 Monitor Risks
11.2 Identify Risks
11.3 Perform Qualitative Risk Analysis
11.4 Perform Quantitative Risk Analysis
11.5 Plan Risk Responses

12- Project Procurement 12.1 Plan Procurement Management 12.2 Conduct Procurements 12.3 Control Procurements
Management
13- Project Stakeholder 13.1 Identify Stakeholders 13.2 Plan Stakeholder Engagement 13.3 Manage Stakeholder 13.4 Monitor Stakeholder
Management Engagement Engagement 4
We are about to produce 20 tables in 20 days cost is $20 for each.
How much BAC = ???
BAC = $20 * 20 tables = $400
Today is day 4 How much is the PV ?
PV = $20 x 4 tables = $80
At day 4 I earned only 3 tables, how much is the EV ?
EV = $20 x 3 tables = $60
AC = ??? X 3 tables = $90
SV = EV – PV = 60 – 80 = -$20
CV =EV – AC = 60 – 90 = -$30
SPI = EV / PV = 60 / 80 = 0.75
CPI = EV / AC = 60 / 90 = 0.666
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 FORECASTING
 EAC forecast for ETC at new estimate
 EAC = AC+ETC
 90+ 300 = 390
 EAC forecast for ETC work performed at the budgeted rate
 EAC = AC+(BAC-EV )
 = 90+ (400-60)=430
 EAC forecast for ETC work considering both SPI and CPI factors
 EAC =AC+((BAC-EV) /(CPI*SPI))
 =90 +((400 – 60 )/ (.495 )) = 770
 EAC forecast for work performed at the percent CPI
 EAC = BAC/ CPI
 =400 / .66 = 600
 EACt forecast for the Duration of the project
 EACt = ED/SPI
 =20 / .75 = 27 Days
 Variance at Completion (VAC)

B AC what the total job is supposed to cost

E AC what the total job is expected to cost

VARIANCE AT COMPLETION is the difference between what the total job is

supposed to cost and what the total job is now expected to cost.

FORMULA: VAC = BAC - EAC

Example: VAC = $400 - $430

VAC = - $30 (negative = overrun)
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EXERCISE
.

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Wall Construction
Wall Construction
Time = 1 week per wall
Cost = $ 1,000 per wall,
materials and labor
Total Schedule = 4 weeks
Total Cost = $ 4,000
Working days 5 day per
week starting on Sunday
and finish on Thursday by 5
PM
Assume production is liner
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 5 pm Wednesday, Week 2

How much work should

have been completed -PV?
PLANNED Wall 1 100% = $ 1,000
Wall 2 80% = $ 800
Wall 3 0% = 0
Wall 4 0% = 0
PV = $ 1,800
 5 pm Wednesday, Week 2

10 %
What is the budgeted
value of actual work - EV?
EARNED
Wall 1 100% = $ 1,000
Wall 2 50% = $ 500
Wall 3 10% = $100
Wall 4 0% = 0
50 % EV = $1,600
5 pm Wednesday, Week 2

Total Cost to date –

AC = $ 2,250
5 pm Wednesday, Week 2
Earned Value
PV $1,800
EV $1,600
AC $2,250

Schedule Variance = EV - PV
= $1,600 - $1,800
= ($200)
Cost Variance = EV - AC
= $1,600 - $2,250
= ($650)
5 pm Wednesday, Week 2
Performance Indices
PV $1,800
EV $1,600
AC $2,250

SPI = EV / PV
= $1,600 / $1,800
= .9
CPI = EV / AC
= $1,600 / $2,250
= .7
 QUESTIONS & ANSWERS EV

1. You are a project manager working on a project that requires 100 widgets to be
built in five weeks. You have just begun week three, with an overall budget of
US $10,000. To date you have spent US $2,000 with 40 widgets successfully
built. What does the cost variance tell you in this circumstance?

A. The project is proceeding at 100% of the expected rate

B. The project is getting $2 of work for every dollar spent
C. The project is on budget
D. The project is $2000 under budget
 QUESTIONS & ANSWERS EV

2. You are a project manager for a small construction project. Your project was
budgeted for US $72,000 over a six week period. As of today, you've spent US
$22,000 of your budget to complete work that you originally expected would
cost US $24,000. According to your schedule, you should have spent US
$21,000 by this point. Based on these circumstances, your project could be
BEST described as:

A. Over budget
B. On budget
C. Under budget
D. Not having enough information provided
 QUESTIONS & ANSWERS EV

3. A cost Performance Index (CPI) of 0.89 means:

A. At this time, we expect the total project to cost 89% more than
planned.
B. When the project is completed we will have spent 89% more
than planned.
C. The project is only progressing at 89% of that planned.
D. The project is only getting 89 cents out of every dollar invested.
 QUESTIONS & ANSWERS EV

4. A Schedule Performance Index (SPI) of 0.76 means:

A. We are over budget.

B. We are a head of schedule.
C. We are only progressing at 76% of the rate originally planned.
D. We are only progressing at 24% of the rate originally planned.
 Questions & Answers EV

Given:
BAC = 200
AC = 120
EV = 80
CPI = 0.666
Assuming that current
variances are typical of
future variances, the
estimate at completion
(EAC) is:

A. 220.
B. 260.
C. 300.
D. 320.

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 Questions & Answers EV

1. Given:
BAC = 200
AC = 120
EV = 80
CPI = 0.666
Assuming that current
variances are atypical , the
estimate at completion (EAC)
is:
A. 120.
B. 160.
C. 300.
D. 240.

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 Types Of Costs
Direct Costs

Indirect costs

Fixed costs

Variable costs

Opportunity costs

Sunk costs

Working Capital
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 DEPRECIATION

Straight Line Depreciation

The same amount of depreciation is taken
each year, A US $ 1,000 item with a ten year
useful life and no salvage value (how much
item is worth at the end of its life) would be
depreciated at US $100 per year.

Accelerated Depreciation
There are two forms of accelerated
depreciation:
1. Double Declining Balance
2. Sum of the Years Digits.
They depreciate faster than straight line.
You do not have to know what these two
forms means or do any calculations.
 Present Value
 Budgeting technique that debates the
future value of money based on inflation,
Year FV PV
etc.
0 $50,000 $50,000
 PV = FV 1 $35,000 $31,819
2 $15,000 $12,397
(1 + r)t

FV = amount of money t years from now Assume a 10% interest (discount

rate)
r = interest rate (also called “discount rate”)
PV (Year 1) = FV / (1 + r)t
t = time period
=$35,000/(1 + 0.1)1
= $31,819
 Net Present Value (NPV)

This Means the total benefits (income or revenue) less the cost. To calculate
NPV you need to calculate the present value of each of the income and
revenue figures then add up the present values.

Time Income or Present Value at Present Value at

Costs
Period revenue 10% interest rate 10% interest rate

0 0 0 200 200

1 50 45 100 91

2 100 83 0 0

3 300 225 0 0

Total 353 291

NPV =353-291=62
 PAYBACK PERIOD

The exact length of time needed to recover an initial investment as

calculated from cash inflows.

Month Costs Total Cost Benefits Total Benefits

1 $5000 $5000 $0 $0
2 $5000 $10000 $0 $0
3 $8000 $18000 $0 $0
4 $5000 $23000 $5000 $5000
5 $2000 $25000 $10000 $15000
6 $0 $25000 $10000 $25000
7 $0 $25000 $10000 $35000

PAYBACK PERIOD is 6 MONTHS

 Benefit Cost Ratio (BCR) INTERNAL RATE OF RETURN (IRR)

 Compares the cost to the benefits of  The interest (discount) rate where the
different projects. A BCR of > 1 means present value of the benefits exactly
the benefits are grater than the costs. A equals the costs.
BCR of < 1 means the costs are grater  The higher the rate, the better the
than the benefits. A BCR =1 means the project.
costs and benefits are the same.
 An IRR of 0.15 means that you expect
 If the BCR of project A is 2.3 and BCR of the project to return an average of
project B is 1.7 which project would you 15% on your investment over a given
select? time period (usually a number of
years).

The answer is A. the project with the

higher BCR
EXERCISE: ACCOUNTING STANDARDS

Project A Project B Choice

Net present V $95.00 $75.00 A

IRR 13% 17% B

Payback Period 21 Month 16 Month B

Benefit Cost Ratio 2.79 1.3 A

 RESERVES Budget
 Contingency reserve Management reserve
 Project Manager
+
Cost baseline
 Management Reserve
 Top management (Senior Management) Contingency reserve
+
Cost estimate
WBS

sub1 Sub2

Work Work Work

package package package
 LIFE CYCLE COSTING

LIFE CYCLE COSTING : Means that the cost of operation

and maintenance phase to be consider and manage with
the project cost

PROJECT OPERATIONS AND

MAINTENANCE PHASE

costs costs
 Project Cost Management

Planning Monitoring & Controlling

Plan Cost Estimate determine Control Cost

Management Costs Budget

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 Plan Cost Management
Inputs Tools & Techniques Outputs
.1 Project charter .1 Cost management
.1 Expert judgment
.2 Project management plan
plan .2 Data analysis
• Schedule .3 Meetings
management plan
• Risk management
plan
.3 Enterprise
environmental
factors
.4Plan Cost Management is the process of defining how the project costs
Organizational
willprocess
be estimated,
assets budgeted, managed, monitored, and controlled.
The key benefit of this process is that it provides guidance and
direction on how the project costs will be managed throughout the
project.
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 PLAN COST MANAGEMENT

• the project charter provides the preapproved financial resources from which the detailed project costs
are developed. The project charter also defines the project approval requirements that will influence the
management of the project costs.
 DATA ANALYSIS:includes but is not limited to alternatives analysis. Alternatives analysis can include
reviewing strategic funding options such as: self-funding, funding with equity, or funding with debt. It
can also include consideration of ways to acquire project resources such as making, purchasing, renting,
or leasing.
 the cost management plan can establish the following:
 Units of measure, Level of precision, Level of accuracy,
 Control thresholds, Rules of performance measurement,
 Reporting formats,
 Estimate Costs

Inputs Tools & Techniques Outputs

.1 Cost estimates
.1 Project management plan
• Cost management plan .1 Expert judgment .2 Basis of estimates
• Quality management plan .2 Analogous estimating .3 Project documents
• Scope baseline .3 Parametric estimating updates
.2 Project documents .4 Bottom-up estimating
• Lessons learned register
• Assumption log
.5 Three-point estimating • Lessons learned
• Project schedule
.6 Data analysis
• Resources requirements register
• Risk register • Alternatives analysis
.3 Enterprise environmental • Reserve analysis • Risk register
factors • Cost of quality
.4 Organizational process assets .7 Project management
information system
.8 Decision making
• Voting

Estimate Costs Estimate Costs is the process of developing an approximation of

the cost of resources needed to complete project work.
The key benefit of this process is that it determines the monetary resources
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required for the project.
Cost estimates should be reviewed and refined during the course of the project to reflect additional detail
as it becomes
available and assumptions are tested. The accuracy of a project estimate will increase as the project
progresses through
the project life cycle.

 Rough order of magnitude : Made during initiation process ROM is

 -25% to 75%

 Budget Estimate: During planning

 -10% to 25%

 Definitive Estimate: Later During the project

 -5% to + 10%

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 Determine budget
Inputs Tools & Techniques Outputs
.1 Project management plan .1 Cost baseline
.2 Project funding requirements
• Cost management plan
• Resource management plan
.1 Expert judgment .3 Project documents updates
.2 Cost aggregation • Cost estimates
• Scope baseline
.3 Data analysis • Project schedule
.2 Project documents
• Reserve analysis • Risk register
• Basis of estimates
.4 Historical information review
• Cost estimates
.5 Funding limit reconciliation
• Project schedule
.6 Financing
• Risk register
.3 Business documents
• Business case
• Benefits management plan
.4 Agreements
.5 Enterprise environmental
factors
.6 Organizational process assets

Determine Budget is the process of aggregating the estimated costs of individual activities or work packages
to establish an authorized cost baseline.
The key benefit of this process is that it determines the cost baseline against which project performance can
be monitored and controlled.
 DETERMINE BUDGET: TOOLS AND TECHNIQUES

 COST AGGREGATION: Cost estimates are aggregated by work packages in

accordance with the WBS.
Planned Value (PV)
 DETERMINE BUDGET: OUTPUTS

 COST BASELINE:The cost baseline is the approved version of the time-phased project
budget, excluding any management reserves, which can only be changed through formal
change control procedures.
 DETERMINE BUDGET: OUTPUTS

 PROJECT FUNDING REQUIREMENTS

 Total funding requirements and periodic funding requirements (e.g., quarterly, annually) are derived from the cost

baseline.
 Funding often occurs in incremental amounts, and may not be evenly distributed, which appear as steps.
 Cost estimates are updated to record any additional information.
 Project schedule Estimated costs for each activity may be recorded as part of the project schedule.
 Risk register. New risks identified during this process are recorded in the risk register and managed using the risk
management processes.
 Control Costs
Inputs Tools & Techniques Outputs
.1 Project management plan
• Cost management plan .1 Work performance
• Cost baseline .1 Expert judgment information
• Performance measurement .2 Data analysis .2 Cost forecasts
baseline • Earned value analysis .3 Change requests
.2 Project documents • Variance analysis .4 Project management plan
• Lessons learned register • Trend analysis updates
.3 Project funding requirements • Reserve analysis • Cost management plan
.4 Work performance data .3 To-complete performance • Cost baseline
.5 Organizational process assets index • Performance measurement
.4 Project management baseline
information system .5 Project documents updates
• Assumption log
• Basis of estimates
• Cost estimates
• Lessons learned register
• Risk register

Control Costs is the process of monitoring the status of the project to update the project costs and managing changes to
the cost baseline . 40
The key benefit of this process is that it provides the means to recognize variance from the plan in order to take corrective
action and minimize risk.
Project Performance Management
Cost
EAC
Data date
BAC

AC
PV CV= EV - AC
SV= EV - PV
EV
Time
To-Complete Performance index
(TCPI)

• TCPI is a CPI that

must be achieved in
order to meet a
certain management
goal for the project
(such as BAC or
EAC).
QUESTIONS

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1- HALF WAY THROUGH THE EXECUTING PROCESSES OF YOUR
PROJECT, A TEAM MEMBER ALERTS YOU TO A POTENTIAL COST
OVERRUN FOR A SPECIFIC DELIVERABLE. WHAT DO YOU DO
FIRST?

A ) Determine the projected actual cost.

B ) Implement a change control process to track
the change
C ) Inform the customer.
D ) Determine the cause of the overage
2 - WHICH TYPE OF COSTS IS TEAM TRAINING?

A ) Direct
B ) EV
C ) Indirect
D ) fixed

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3- A PROJECT MANAGER HAS COMPLETED A DETAILED WBS AND
COST ESTIMATES FOR EACH WORK PACKAGE. TO CREATE A COST
BASELINE FROM THIS DATA, THE PROJECT MANAGER WOULD :

A ) Use the highest level of the WBS to estimate analogously

B ) Sum up the work package and risk contingency reserve estimates.
C ) Roll up work package estimates into a project total and add
managements reserves.
D ) Gain expert opinions of the project costs.

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4- YOU ARE HAVING DIFFICULTY ESTIMATING THE COST OF YOUR
PROJECT. WHISH OF THE FOLLOWING BEST DESCRIBES THE MOST
PROBABLE CAUSE OF YOUR DIFFICULTY?

A ) Inadequate scope definition

B ) Unavailability of desired resources
C ) Lack of historical records from previous projects
D ) Lack of company processes
5- WHICH OF THE FOLLOWING REPRESENTS THE VALUE OF
WORK WE HAVE ACTUALLY COMPLETED?

A ) Earned value
B ) Planned value
C ) Actual cost
D ) Estimate to complete

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6- IF EARNED VALUE (EV) IS U.S.$300000, ACTUAL COST
(AC) IS U.S.$350000, AND PLANNED VALUE (PV) IS U.S.
$375000, WHAT DOES THE SCHEDULE PERFORMANCE
INDEX (SPI) INDICATE?

A ) You are progressing at 86% of the rate originally planned.

B ) You are progressing at 125% of the rate originally planned.
C ) You are progressing at 116% of the rate originally planned.
D ) You are progressing at 80% of the rate originally planned.

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 7- THE FORMULA, EAC = BAC/CPI, ASSUMES THAT:

A ) All subsequent work will be completed at the planned

expenditures.
B ) All subsequent work will be completed at the planned
expenditures, excluding the work packages currently under way
C ) All subsequent work will be completed based upon the cost
performance to-date
D ) The cost performance cannot change during the project

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8- FEASIBILITY STUDY ANSWERS THE QUESTION “CAN WE DO
IT?” COST BENEFIT ANALYSIS ANSWER THE QUESTION---------

A ) Should we do it?
B ) Are the safety risks acceptable?
C ) Is it beneficial to have a high level sponsor?
D ) Does the technology exist?

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9- WHAT TOOL MUST PROJECT MANAGERS RELY UPON TO
ACCURATELY IDENTIFY THE COSTS ASSOCIATED WITH THE
PROJECT?

A ) A bill of materials
B ) A Gantt chart
C ) A precedence diagram network
D ) A work breakdown structure

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