2. What is Cost and Project Cost Management?
Cost is a resource sacrificed or foregone to
achieve a specific objective or something given up
Costs are usually measured in monetary units like
Project cost management includes the processes
required to ensure that the project is completed
within an approved budget
3. Basic Principles of Cost Management
Most CEOs and boards know a lot more about
finance than IT, so IT project managers must
speak their language
Profits are revenues minus expenses
Life cycle costing is estimating the cost of a project plus
the maintenance costs of the products it produces
Cash flow analysis is determining the estimated annual
costs and benefits for a project
Benefits and costs can be tangible or intangible, direct
Sunk cost should not be a criteria in project selection
4. Basic Principles of Cost Management
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.
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.
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.
5. Basic Principles of Cost Management
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
Contingency reserves allow for future situations that
may be partially planned for (sometimes called known
unknowns) and are included in the project cost
Management reserves allow for future situations that
are unpredictable (sometimes called unknown
6. Types of Construction Costs:
Expenses related to the initial establishment of the
Land acquisition, including assembly, holding and
Planning and feasibility studies
Architectural and engineering design
Construction, including materials, equipment and labor
Field supervision of construction
Insurance and taxes during construction
Owner's general office overhead
Equipment and furnishings not included in construction
Inspection and testing
7. Operating and Maintenance Cost:
The operation and maintenance cost in subsequent
years over the project life cycle includes the following
Land rent, if applicable
Labor and material for maintenance and repairs
Insurance and taxes
Owner's other expenses
The magnitude of each of these cost components depends on the
nature, size and location of the project as well as the management
organization, among many considerations. The owner is interested in
achieving the lowest possible overall project cost that is consistent with
its investment objectives.
8. Contingencies provisions:
In most construction budgets, there is an allowance for
contingencies or unexpected costs occurring during
construction. This contingency amount may be included
within each cost item or be included in a single category of
The amount of contingency is based on historical experience
and the expected difficulty of a particular construction project
For example, one construction firm makes estimates of the
expected cost in five different areas:
Design development changes,
General administration changes (such as wage rates),
Differing site conditions for those expected, and
Third party requirements imposed during construction, such as new
9. Project Cost Management
Project Cost Management includes the processes involved
in planning, estimating, budgeting, and controlling costs so
that the project can be completed within the approved
Cost Estimating – developing an approximation of the
costs of the resources needed to complete project
Cost Budgeting – aggregating the estimated costs of
individual activities or work packages to establish a cost
Cost Control – influencing the factors that create cost
variances and controlling changes to the project budget.
10. Cost Estimating: Tools and Techniques
Analogous Estimating: Using the actual cost of previous, similar
projects as the basis for estimating the cost of the current project.
Analogous cost estimating uses expert judgment.
Analogous cost estimating is frequently used to estimate costs when
there is a limited amount of detailed information about the project
Generally less costly than other techniques
Generally less accurate
Determine Resource Cost Rates
For each resource to estimate schedule activity costs.
Standard rates with escalation factors can be included in the
Obtaining data from commercial databases and seller published
price lists is another source of cost rates.
11. Bottom-up Estimating
This technique involves estimating the cost of individual work packages
or individual schedule activities with the lowest level of detail.
The cost and accuracy of bottom-up cost estimating is typically motivated
by the size and complexity of the individual schedule activity or work
Generally, activities with smaller associated effort increase the accuracy
of the schedule activity cost estimates.
Parametric estimating is a technique that uses a statistical relationship
between historical data and other variables (e.g., square footage in
This technique can produce higher levels of accuracy depending upon
the sophistication, as well as the underlying resource quantity and cost
data built into the model.
A cost-related example involves multiplying the planned quantity of work
to be performed by the historical cost per unit to obtain the estimated
12. Project Management Software
Project management software, such as cost estimating software
applications, computerized spreadsheets, and simulation and
statistical tools, are widely used to assist with cost estimating.
Vendor Bid Analysis
Other cost estimating methods include vendor bid analysis and an
analysis of what the project should cost.
In cases where projects are won under competitive processes,
additional cost estimating work can be required of the project team
to examine the price of individual deliverables, and derive a cost
that supports the final total project cost.
Many cost estimators include reserves, also called contingency
allowances, as costs in many schedule activity cost estimates.
This has the inherent problem of potentially overstating the cost
estimate for the schedule activity.
13. Cost Budgeting:
Cost budgeting involves aggregating the estimated costs of individual
schedule activities or work packages to establish a total cost baseline
for measuring project performance.
Schedule activity cost estimates are aggregated by work packages
in accordance with the WBS.
Reserve analysis establishes contingency reserves, such as the
management contingency reserve, that are allowances for
unplanned, but potentially required, changes. Such changes may
result from risks identified in the risk register.
Funding Limit Reconciliation
Large variations in the periodic expenditure of funds are usually
undesirable for organizational operations. Therefore, the
expenditure of funds is reconciled with the funding limits set by the
customer or performing organization on the disbursement of funds
for the project.
14. Cost Budgeting: Outputs
The cost baseline is a time-phased
budget that is used as a basis against
which to measure, monitor, and control
overall cost performance on the
Project Funding Requirements
Funding requirements, total and
periodic (e.g., annual or quarterly), are
derived from the cost baseline and can
be established to exceed, usually by a
margin, to allow for either early
progress or cost overruns.
Funding usually occurs in incremental
amounts that are not continuous, and,
therefore, appears as a step function.
15. Cost Control
Project cost control includes:
Influencing the factors that create changes to the cost baseline
Ensuring requested changes are agreed upon
Managing the actual changes when and as they occur
Assuring that potential cost overruns do not exceed the authorized
funding periodically and in total for the project
Monitoring cost performance to detect and understand variances
from the cost baseline
Recording all appropriate changes accurately against the cost
Preventing incorrect, inappropriate, or unapproved changes from
being included in the reported cost or resource usage
Informing appropriate stakeholders of approved changes
Acting to bring expected cost overruns within acceptable limits.
16. Cost Control Inputs:
Project Funding Requirements
Work Performance Information
Approved Change Requests
Project Management Plan
17. Cost Control: Tools and Techniques
Cost Change Control System
A cost change control system, documented in the cost
management plan, defines the procedures by which the cost
baseline can be changed.
Performance Measurement Analysis
Performance measurement techniques help to assess the
magnitude of any variances that will invariably occur.
The earned value technique (EVT) compares the cumulative
value of the budgeted cost of work performed (earned) at the
original allocated budget amount to both the budgeted cost of
work scheduled (planned) and to the actual cost of work
This technique is especially useful for cost control, resource
management, and production.
18. Cost Control Tools:
Cost Change Control System
A cost change control system, documented in the cost
management plan, defines the procedures by which the
cost baseline can be changed. It includes the forms,
documentation, tracking systems, and approval levels
necessary for authorizing changes.
Performance Measurement Analysis
Performance measurement techniques help to assess
the magnitude of any variances that will invariably
occur. The earned value technique (EVT) compares the
cumulative value of the budgeted cost of work
performed (earned) at the original allocated budget
amount to both the budgeted cost of work scheduled
(planned) and to the actual cost of work performed
(actual). This technique is especially useful for cost
control, resource management, and production.
19. EVM: Earned Values Management
The Earned Value Technique ( EV) involves developing these key
values for each schedule activity, work package, or control account:
It is a method measuring project performance by comparing the
amount of work planned with actually accomplished, in order to
determine if cost and schedule performance as planned.
Data Element Term Acronyms
Scheduled Work Budgeted Cost of Work Scheduled PV
Earned Value Budgeted Cost of work performed EV
Actuals Actual Cost of Work performed AC
Authorized Work Budget at Completion BAC
Forecasted Cost Estimate at Completion EAC
Work variance Schedule Variance SV
Cost Variance Cost Variance CV
Completion Variance Completion Variance VAC
20. Variance Calculations:
Cost variance (CV).
CV equals earned value (EV) minus actual cost (AC).
The cost variance at the end of the project will be the difference
between the budget at completion (BAC) and the actual amount
Formula: CV= EV – AC
A negative value of CV would mean Cost over run
SV equals earned value (EV) minus planned (PV). Schedule
variance will ultimately equal zero when the project is completed
because all of the planned values will have been earned.
Formula: SV = EV – PV
Negative SV would mean Time over run.
21. Performance Indices
Cost performance index (CPI).
A CPI value less than 1.0 indicates a cost overrun of the
estimates. A CPI value greater than 1.0 indicates a cost
under run of the estimates.
CPI = EV /AC.
CPI is the most commonly used cost-efficiency
Formula: CPI = EV/AC
Schedule performance index (SPI).
The SPI is used, in addition to the schedule status , to
predict the completion date and is sometimes used in
conjunction with the CPI to forecast the project
completion estimates. SPI equals the ratio of the EV to
Formula: SPI = EV/PV
22. Estimate At Completion EAC:
EAC = AC+ETC
Estimate to Complete ETC:
ETC equals the revised
estimate for the work
23. The earned value technique in its various forms is a commonly used method
of performance measurement. It integrates project scope, cost (or resource)
and schedule measures to help the project management team assess
24. Cost and Schedule Forecasting
Exercise #1:Schedule Variance Example.
PV = $ 42000
EV = $ 38000
AC = $ 48000
Budget at Completion BAC = $80000
SV = EV – PV = $38000 – 42000 = - $4000
SV % = SV/PV = -4000/42000 = -9.5 % Hence there is
schedule overrun of 9.5%
Exercise #2: Cost Variance Example.
CV = EV- AC = 38000 – 48000 = - 10000
CV% = CV/EV = -10000/38000 = -26 % Schedule
overrun by 26%
25. # 3 Cost Performance Index ( CPI)
CPI = EV/AC = 38000/48000 = 0.79
Hence $0.79 worth of work was done for every $ 1 spent.
#4 Schedule Performance Index: SPI
SPI = EV/PV = 38000/42000 = 0.90
$ 0.90 worth of work has been for each done for each
$1.00 worth of work that was planned to be done.
#5. Estimate at Completion and Variance at
EAC = BAC/CPI = 80000/0.79 = $101265
VAC = BAC – EAC = 80000-101265 = - $ 21265. The
project will exceed the planned budget by $21265
BAC = 40 K
EV = 20 K
PV = 28 K
AC = 26 K
% of work scheduled
% of budget spent
Cost Variance CV
Scheduled Variance SV
27. Case 1:
PV = 1600
EV = 1600
AC = 1600
Ideal Case where every thing goes as per plan.
400 worth of work is behind schedule
SV = EV- PV = 1500-1900= -400
SV%= ( SV/PV)x100 = -21%
CV = EV – AC = 1500 – 1700= -200 Cost overrun by 200
CV% = (CV/EV)x100 = -13%
SPI = EV/PV = $0.79
CPI= EV/AC = $0.88
28. Unit Cost Method of Estimation
If the design technology for a facility has been specified,
the project can be decomposed into elements at various
levels of detail for the purpose of cost estimation.
The unit cost for each element in the bill of quantities
must be assessed in order to compute the total
construction cost. This concept is applicable to both
design estimates and bid estimates, although different
elements may be selected in the decomposition.
For design estimates, the unit cost method is
commonly used when the project is decomposed into
elements at various levels of a hierarchy as follows:
29. Preliminary Estimates. The project is decomposed
into major structural systems or production equipment
items, e.g. the entire floor of a building or a cooling
system for a processing plant.
Detailed Estimates. The project is decomposed into
components of various major systems, i.e., a single
floor panel for a building or a heat exchanger for a
Engineer's Estimates. The project is decomposed
into detailed items of various components as warranted
by the available cost data. Examples of detailed items
are slabs and beams in a floor panel, or the piping and
connections for a heat exchanger.
30. Computer Aided Cost Estimation
Some of the common features of computer aided cost estimation software
Databases for unit cost items such as worker wage rates, equipment rental
or material prices. These databases can be used for any cost estimate
required. If these rates change, cost estimates can be rapidly re-computed
after the databases are updated.
Databases of expected productivity for different components types,
equipment and construction processes.
Import utilities from computer aided design software for automatic quantity-
take-off of components. Alternatively, special user interfaces may exist to
enter geometric descriptions of components to allow automatic quantity-
Export utilities to send estimates to cost control and scheduling software.
This is very helpful to begin the management of costs during construction.
31. Version control to allow simulation of different construction
processes or design changes for the purpose of tracking
changes in expected costs.
Provisions for manual review, over-ride and editing of any
cost element resulting from the cost estimation system
Flexible reporting formats, including provisions for
electronic reporting rather than simply printing cost
estimates on paper.
Archives of past projects to allow rapid cost-estimate
updating or modification for similar designs.
32. Components of Project Cost Estimates for Major Projects
Preliminary Engineering. This is the cost to
prepare the construction documents.
Right-of-Way. This is the cost to research and
acquire right-of-way for the project, including
easements. Include right-of-way costs for storm
water management, wetland mitigation, and
other work outside the roadway prism.
External Third Party (e.g. Utilities and
Railroad Adjustments). Perhaps the most
difficult costs to estimate are those that are
associated with third parties, such as utilities and
33. Using Software to Assist in Cost
Spreadsheets are a common tool for resource planning,
cost estimating, cost budgeting, and cost control.
Many companies use more sophisticated and centralized
financial applications software for cost information.
Project management software has many cost-related
features, especially enterprise PM software.