How Do We Manage Cost?
Three processes
 Cost Estimating
 Cost Budgeting
 Cost Control
Cost Estimating Cost Budgeting Cost Control
The process involved in estimating, budgeting, and controlling cost
so that the project can be completed within approved budget
Project Cost Management

Project Cost Estimation
Project cost estimation is the process of
developing an approximation of the
monetary resources needed to complete
project activities.
Cost estimates are a prediction that is
based on the information known at a given
point in time.

Cost Estimating
Enterprise
Environmental
Factors
Organizational
Process Assets
Project Scope
Statement
Analogous estimating
Bottom up estimating
Parametric estimating
Three- Points estimate
Project management
software
Vendor bid analysis
Reserve analysis
Cost of quality
Inputs
OutputsTools & Techniques
Work Breakdown
Structure
WBS Dictionary
Cost
Estimating
Cost
Budgeting
Cost
Control
Project
Management Plan
•Schedule Mgmt Pln
•Staffing Mgmt Pln
•Risk Register
Activity Cost
Estimates
Activity Cost
Estimates
Supporting Detail
Requested
Changes
Cost Management
Plan Updates

Analogous estimating
Bottom up estimating
Parametric estimating
Three- Points estimate
Project management software
Vendor bid analysis
Reserve analysis
Cost of quality

Types of Cost Estimates
Type of Estimate When Done Why Done How Accurate
Rough Order of
Magnitude (ROM)
Very early in the
project life cycle,
often 3–5 years
before project
completion
Provides rough
ballpark of cost for
selection decisions
–25%, +75%
Budgetary Early, 1–2 years out Puts dollars in the
budget plans
–10%, +25%
Definitive Later in the project, <
1 year out
Provides details for
purchases, estimate
actual costs
–5%, +10%

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Cost Baseline
Cost performance baseline is a time-phased budget used
to measure, monitor and control cost performance over
the project.
Determine Budget
Process of aggregating the estimated cost of individual activities or work
packages to establish an authorized cost baseline

Cost control:
Cost control: controlling changes to the project budget
.
Earned value management is an important tool for cost
control

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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.
You must enter actual information periodically to
use EVM.
More and more organizations around the world
are using EVM to help control project costs.

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Earned Value Management
Planned Value, Earned Value, Actual Costs
Variances
Performance Indices

Earned Value Formulas
NAME FORMULA NOTES
Cost Variance (CV) EV-AC Negative = Over budget
Positive = Under budget
Schedule Variance
(SV)
EV-PV Negative = Behind Schedule
Positive = Ahead of Schedule
Cost Performance
Index (CPI)
EV/AC How much are we getting for every
dollar we spend?
Schedule Perform
Index (SPI)
EV/PV Progress as % against plan
Estimate to
Complete (ETC)
EAC-AC How much more do we have to
spend?
Variance at
Completion (VAC)
BAC-EAC At the end of the day, how close will
we be to plan?
Estimate at
Completion (EAC)
See following slide

Earned Value Formulas (Cont’d)
NAME FORMULA NOTES
Estimate at
Completion (EAC)
BAC/CPI Use if no variances from
BAC have occurred
AC+ATC Use when original
estimate was bad. Actuals
+ New estimate
AC+BAC-EV Use when current
variances are not expected
to be there in the future
AC+(BAC-EV)/CPI Use when current
variances are expected to
continue

Earned Value Calculations

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Figure 7-5. Earned Value Chart
for Project after Five Months
If the EV
line is
below the
AC or PV
line, there
are
problems
in those
areas.

Earned Value Chart
The chart helps visualize how the project is
performing.
 If the project goes as planned, it will finish in 12
months at a cost of $100,000
 The actual cost line is always right on or above
the earned value line.
Interpretation: This means costs are equal to or more
than planned
 The planned value line is pretty close to the EV
line, just slightly higher in the last month
Interpretation: The project has been right on schedule
until last month when the project fell behind schedule

PV, EV, AC

Variances
• CV (Cost Variance): difference between the budgeted
cost of an activity and the actual cost of that activity.
CV = EV – AC
• SV (Schedule Variance): difference between the
scheduled completion of an activity and the actual
completion of the activity.
SV = EV – PV

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Performance Indices
• CPI (Cost Performance Index): The cost-efficiency factor
representing the relationship between the actual costs
expended and the value of the physical work performed.
CPI = EV/AC
• SPI (Schedule Performance Index): The schedule
efficiency ratio of earned value accomplished against the
planned value. The SPI describes what portion of the
planned schedule was actually accomplished.
SPI = EV/PV

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Forecasting
• Budget at Completion (BAC)
• Forecasted Estimate at Completion (EAC) at the
budgeted rate
EAC = BAC + AC – EV
• Forecasted Estimate at Completion (EAC) at the present
CPI
EAC = BAC / CPI
• To-Complete Performance Index (TCPI) – projection of
cost performance that must be achieved on the remaining
to meet a specified goal
(BAC – EV) / (BAC – AC)