Topic: Project Management, Referece: PMBOK 5, PMI. Degree: MBA, Syllabus: Alliance University. Date : Jan 2015. Please note: This was prepared as a teaching aid. Not for commercial purposes. Sharing to spread the knowledge of Project Management. Note : Copyright belongs to respective owners. List of top references used to prepare these slides given. If you have any questions, comments, improvement suggestions, Email to: niranjanakoodavalli@gmail.com

1. Project Management
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Prepared by - Niranjana K R for Alliance
University
Chapter 7: Project Cost Management
Faculty: Niranjana K R
B.E., QA Professional, Six Sigma Black Belt, LA for ISO 9001 and AS 9100 Rev C, Member of PMI & QCFI

2. Chapter 7: Topics
Introduction to Project Cost Management
7.1 Plan Cost Management – Inputs, Tools and Techniques, Outputs
7.2 Estimate Costs – Inputs, Tools and Techniques, Outputs
7.3 Determine Budget – Inputs, Tools and Techniques, Outputs
7.4 Control Costs – Inputs, Tools and Techniques, Outputs
Refer : Annex A1 – The Standard for Project Management of a Project – P 417 – 461 to understand
interactions between these processes and other knowledge areas.
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3. 7 Project Cost Management (1 of 3)
• 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.
• Figure 7-1 provides an overview of the Project Cost Management Processes,
which are:
– Plan Cost Management
– Estimate Costs
– Determine Budget
– Control Costs
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4. 7 Project Cost Management (2 of 3)
• Project cost management is primarily concerned with the cost
of the resources needed to complete project activities.
• It should also consider the effect of project decisions on the
subsequent recurring cost of using, maintaining, and supporting
the product, service, or result of the project.
• The project Cost Management should consider the stakeholder
requirements for managing costs.
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5. 7 Project Cost Management (3 of 3)
• Different stakeholders will measure project costs in different ways and at
different times.
– For Ex.,: The cost of an acquired item may be measured when:
• The acquisition decision is made or committed,
• The order is placed,
• The item is delivered, OR
• When the actual cost is incurred or recorded for project accounting
purposes.
• In many organizations, predicting and analyzing the prospective financial
performance of the project’s product is performed outside of the project.
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6. 7.1 Plan Cost Management (1 of 2)
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7. 7.1 Plan Cost Management (2 of 2)
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• This is the process (Figure 7-3) that establishes the policies,
procedures, and documentation for planning, managing,
expanding, and controlling project costs.
• Key benefit - it provides guidance and direction on how the
project costs will be managed throughout the project.
• Tally, ERP like tools may be used for managing costs.

8. 7.2 Estimate Costs (1 of 2)
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9. 7.1 Plan Cost Management (2 of 2)
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• This is the process (Figure 7-5) of developing an approximation of the
monetary resources needed to complete project activities.
• Key benefit - it determines the amount of money required to
complete the project work.
• Cost estimates are a prediction that is based on the information
known at a given point of time.
• Cost estimates include the identification and consideration of costing
alternatives to initiate and complete the project.
• Cost trade-offs and risks should be considered, such as make vs. Buy
vs. Lease, resource sharing etc. In order to achieve optimal costs for
the project.

10. 7.2.2 Estimate Costs Tools and Techniques (1 of 7)
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7.2.2.1 Expert Judgment
• Guided by historical information,
• Information from prior similar projects.
7.2.2.2 Analogous Estimating
• This uses the values such as scope, cost, budget, and duration or measures
of scale such as size, weight, and complexity from a previous or similar
project as the basis for estimating the cost of the current project.
• It is a gross value estimating approach,
• Based on project complexity, known differences, may be adjusted.

11. 7.2.2 Estimate Costs Tools and Techniques (2 of 7)
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7.2.2.3 Parametric Estimating
• This uses a statistical relationship between relevant historical data and other variance to
calculate a cost estimate for project work.
• This technique can produce higher levels of accuracy depending upon the sophistication
and underlying data built into the model.
• Parametric cost estimates can be applied to a total project or to segments of a project, in
conjunction with other estimating methods.
7.2.2.4 Bottom-up Estimating
• This a method of estimating a component of work.
• The cost of individual work package or activities is estimated to the greatest level of
specified detail.
• The detailed cost is then summarized or “rolled up” to higher levels for subsequent
reporting and tracking purposes.
• The cost and accuracy of bottom-up estimating are typically influenced by the size and
complexity of the individual activity or work package.

12. 7.2.2 Estimate Costs Tools and Techniques (3 of 7)
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7.2.2.5 Three-Point Estimating
• The accuracy of single-point activity cost estimates may be improved by considering estimation
uncertainty and risk
• Also, by using three estimates to define an approximate range for an activity cost:
– Most Likely (cM) – The cost of the activity, based on realistic effort assessment for the required work and
any predicted expenses.
– Optimistic (cO) – The activity cost based on analysis of the best-case scenario for the activity.
– Pessimistic (cP) – The activity cost based on analysis of the worst-case scenario for the activity.
• Depending on the assumed distribution of values within the range of the three estimates, the
expected cost cE, can be calculated using the formula. Two commonly used are triangular and
beta destribution.
• The formulas are:
– Triangular distribution, cE = (cO+cM+cP)/6
• Cost estimates based on three points with an assumed distribution provide an expected cost and
clarify the range of uncertainty around the expected cost.

13. 7.2.2 Estimate Costs Tools and Techniques (4 of 7)
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7.2.2.6 Reserve Analysis
• Cost estimates may include contingency reserves to account for cost
uncertainty.
• Contingency reserves are the budget within the cost baseline that is
allocated for identified risks, which are accepted and for which contingent
or mitigating responses are developed.
• These reserves are intended to address the “known-unknowns” that can
affect a project. For ex: Re-work.
• This may be a percentage of the estimated cost baseline and overall funding
requirements for the project.

14. 7.2.2 Estimate Costs Tools and Techniques (5 of 7)
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7.2.2.7 Cost of Quality (COQ)
• Assumptions about cost of quality may be used to prepare the activity cost
estimate.
7.2.2.8 Project Management Software
• Project management software applications, computerized spreadsheets,
simulation, and statistical tools are used to assist with cost estimating.
• Such tools simplify the cost estimating techniques and facilitate rapid
consideration of cost estimate activities.

15. 7.2.2 Estimate Costs Tools and Techniques (6 of 7)
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7.2.2.9 Vendor Bid Analysis
• Cost estimating methods may include analysis of what the project should
cost, based on the responsive bids from qualified vendors.
• When projects are awarded to a vendor under competitive processes,
additional cost estimating work may be required of the project team to
examine the price of individual deliverables and to derive a cost that
supports the final total project cost.

16. 7.2.2 Estimate Costs Tools and Techniques (7 of 7)
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7.2.2.10 Group Decision-Making Techniques
• A group decision-making technique is an assessment process having
multiple alternatives with an expected outcome in the form of future
actions.
• These techniques are useful for engaging team members to improve
estimate accuracy and commitment to the emerging estimates.
• By involving a structured group of people who are close to the technical
execution of work in the estimation process, additional information is
gained and more accurate estimates are obtained.
• Additionally, when people are involved in the estimation process, their
commitment towards meeting the resulting estimates increases.

17. 7.3 Determine Budget (1 of 2)
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18. 7.3 Determine Budget (2 of 2)
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• This is the process (Figure 7-7) of aggregating the estimated
costs of individual activities or work packages to establish an
authorized cost baseline.
• The key benefit – It determines the cost baseline against which
project performance can be monitored and controlled.

19. 7.3.3.1 Cost Baseline (1 of 2)
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• 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 and is
used as a basis for comparison to actual
results.
• The work package cost estimates, along
with any contingency reserves estimated
for the work packages, are aggregated into
control accounts.
• The summation of the control accounts
make up the cost baseline.

20. 7.3.3.1 Cost Baseline (2 of 2)
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• Since the cost estimates
that make up the cost
baseline are directly tied to
the schedule activities, this
enables a time-phased view
of the cost baseline, which
is typically displayed in the
form of an S-curve as
shown in this figure.

21. 7.4 Control Costs (1 of 3)
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22. 7.4 Control Costs (2 of 3)
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• This is the process (Figure 7-10) of monitoring the status of the project to
update the project costs and managing changes to the cost baseline.
• The key benefit – It provides the means to recognize variance from the plan
in order to take corrective action and minimize risk.
• Budget must be based on actual costs spent.
• Any increase tot he authorized budget can only be approved through the
Perform Integrated Change Process.
• Cost control involves analyzing the relationship between the consumption
of project funds to the physical work being accomplished for such
expenditures (Ex: Timesheet, status report)
• The key to effective cost control is the management of the approved cost
baseline and the changes to that baseline.

23. 7.4 Control Costs (3 of 3)
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• Project cost control includes:
– Influencing the factors that create changes to the authorized cost baseline;
– Ensuring that all change requests are acted on in a timely manner;
– Managing the actual changes when and as they occur;
– Ensuring that cost expenditures do not exceed the authorized funding by period, by
WBS component, by activity, and in total for the project;
– Monitoring cost performance to isolate and understand variances from the approved
cost baseline;
– Monitoring work performance against funds expended;
– Preventing unapproved changes from being included in the reported cost or resource
usage;
– Informing appropriate stakeholders of all approved changes and associated cost; and
– Bringing expected cost overruns within acceptable limits.

24. 7.4.2 Control Costs Tools and Techniques(1 of 3)
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7.4.2.1 Earned Value Management (EVM)

25. 7.4.2 Control Costs Tools and Techniques(2 of 3)
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7.4.2.1 Earned Value Management (EVM)
– It is a methodology that combines scope, schedule, and resources
measurements to assess project performance and progress.
– It integrates the scope baseline with the cost baseline, along with the
schedule baseline, to form the performance measurement baseline, which
helps the project team to assess and measure project performance and
progress.
– It is a project management technique that requires the formation of an
integrated baseline against which performance can be measured for the
duration of the project.
– The principles of EVM can be applied to all projects in any industry.

26. 7.4.2 Control Costs Tools and Techniques(2 of 3)
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7.4.2.1 Earned Value Management (EVM) develops and monitors three key
dimensions for each work package and control account:
– Planned Value (PV) – Is the authorized budget assigned to scheduled work.
– Earned Value (EV) – Is the measure of work performed expressed in terms of
the budget authorized for that work.
– Actual Cost (AC) – Is the realized cost incurred for the work performed on an
activity during a specified time period.

27. 7.4.2 Control Costs Tools and Techniques(3 of 3)
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• Variances monitored against the approved baseline are:
– Schedule Variance (SV) is a measure of schedule performance expressed as the difference between the
EV and PV.
– Equation, SV = EV-PV
– Cost Variance (CV) – Is the amount of budget deficit or surplus at a given point of time, expressed as
difference between EV and AC.
– Equation, CV= EV-AC.
– Schedule Performance Index (SPI) – Is a measure of schedule efficiency expressed as the ratio of EV to
PV.
– SPI >1.0 indicates that more work was completed than was planned.
– Equation, SPI = EV/PV
– Cost Performance Index (CPI) – Is a measure of the cost efficiency of budgeted resources, expressed as
the ratio of EV to AC.
– CPI > 1.0 indicates a cost under run of performance to date.
– Equation, CPI = EV/AC
• Refer Earned Value Summary Table

28. Practice
• Using MS Project try concepts discussed
during this chapter with reference to cases
assigned.
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