General

Once schedule is developed, it provides information on what types of resources including human resources and material resources that need to be deployed over what period of time. This provides a basis to estimate costs, determine budget and control the cost throughout the project. The cost estimation should also take into account the quality cost, risk management cost apart from the direct activity costs. All these facets constitute the cost management knowledge area.

Important ITTOs

7.1 Plan cost management

Inputs

Project Charter

Tools and Techniques

None

Output

Cost management plan

A document that details out how to estimate costs, add buffers and thresholds to change cost baseline.

7.2 Estimate cost

Input

Cost management plan

Human resource management plan

Scope baseline

Project schedule

Risk register

Tools and Techniques

Analogous estimating

Based on the word analogy. When lessons from similar past projects are tapped either through repositories or experience of the project manager himself / herself or expertise of others who have executed similar projects to arrive at estimates, then it is called analogous estimation. Used when there is limited information about the project or a quick estimate is needed.

Parametric estimating

Parametric estimating is an estimating technique in which an algorithm is used to calculate cost or duration based on historical data and project parameters. Parametric estimating uses a statistical relationship between historical data and other variables (e.g., square footage in construction) to calculate an estimate for activity parameters, such as cost, budget, and duration.

Bottom up estimating

Bottom-up estimating is a method of estimating a component of work. The cost of individual work packages 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

Three-point estimation

Based on statistical distribution to find out the mean estimate. It is based on three values – Optimistic estimate (O), Most likely estimate (M) and a Pessimistic estimate (P) and the mean is determined in two ways:

Triangular distribution = (O + M = P) / 3

PERT or Beta distribution = (O + 4M = P) / 6

Reserve analysis

Cost estimates may include contingency reserves (sometimes called contingency allowances) 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. Contingency reserves are often viewed as the part of the budget intended to address the “known-unknowns” that can affect a project. For example, rework for some project deliverables could be anticipated, while the amount of this rework is unknown. Contingency reserves may be estimated to account for this unknown amount of rework.

Cost of Quality (CoQ)

Ensuring quality involves performing certain activities and using better resources which incurs cost. And not ensuring quality results in repair, rework and warranty costs. Both put together, are called cost of quality. This is explained more in detail in the quality management KA.

Project management software

Vendor bid analysis

Analysis of the bids submitted by various vendors to understand the implication on cost.

Group decision making techniques

Please refer to previous sections and common ITTOs

Output

Activity cost estimates

Activity cost estimates are quantitative assessments of the probable costs required to complete project work. Cost estimates can be presented in summary form or in detail. Costs are estimated for all resources that are applied to the activity cost estimate. This includes, but is not limited to, direct labor, materials, equipment, services, facilities, information technology, and special categories such as cost of financing (including interest charges), an inflation allowance, exchange rates, or a cost contingency reserve. Indirect costs, if they are included in the project estimate, can be included at the activity level or at higher levels.

Basis of estimates

A detailed work out of the cost estimates that includes the heads, assumptions and constraints

7.3 Determine budget

Input

Cost management plan

Human resource management plan

Scope baseline

Activity cost estimates

Basis of estimates

Project schedule

Resource calendars

Risk register

Agreements

Contract documents with vendors to whom part of the work is subcontracted or outsourced.

Tools and Techniques

Cost aggregation

Cost estimates are aggregated by work packages in accordance with the WBS. The work package cost estimates are then aggregated for the higher component levels of the WBS (such as control accounts) and ultimately for the entire project.

Reserve Analysis

Budget reserve analysis can establish both the contingency reserves and the management reserves for the project.

Historical relationships

Any historical relationships that result in parametric estimates or analogous estimates involve the use of project characteristics (parameters) to develop mathematical models to predict total project costs. Such models may be simple (e.g., residential home construction is based on a certain cost per square foot of space) or complex (e.g., one model of software development costing uses multiple separate adjustment factors, each of which has numerous points within it).

Funding Limit Reconciliation

The expenditure of funds should be reconciled with any funding limits on the commitment of funds for the project. A variance between the funding limits and the planned expenditures will sometimes necessitate the rescheduling of work to level out the rate of expenditures. This is accomplished by placing imposed date constraints for work into the project schedule.

Output

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 and is used as a basis for comparison to actual results. It is developed as a summation of the approved budgets for the different schedule activities.

Project Funding Requirements

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

Project Document Updates

Please refer the common ITTOs

7.4 Control Costs

Input

Project Management Plan

Project funding requirements

Tools and Techniques

Earned value management

Earned value management (EVM) is a methodology that combines scope, schedule, and resource measurements to assess project performance and progress. It is a commonly used method of performance measurement for projects.

Forecasting

As the project progresses, the project team may develop a forecast for the estimate at completion (EAC) that may differ from the budget at completion (BAC) based on the project performance. The forecasting is done with different formulas for different scenarios.

To-Complete Performance Index (TCPI)

The to-complete performance index (TCPI) is a measure of the cost performance that is required to be achieved          

with the remaining resources in order to meet a specified management goal, expressed as the ratio of the cost to finish the outstanding work to the remaining budget.

Performance reviews

Performance reviews compare cost performance over time, schedule activities or work packages overrunning and underrunning the budget, and estimated funds needed to complete work in progress.

Project management software

Reserve analysis

During cost control, reserve analysis is used to monitor the status of contingency and management reserves for the project to determine if these reserves are still needed or if additional reserves need to be requested.

Outputs

Work performance information

Cost forecasts

Either a calculated EAC value or a bottom-up EAC value is documented and communicated to stakeholders.

Summary

Notes

  • Cost heads
    • Capital costs – buildings and infrastructure
    • Cost of capital – cost of raising the capital
    • Direct costs – Resource cost in the form of material cost (purchase / rent / lease), human resource cost (Salary / subcontract cost / billable staff cost)
    • Indirect cost – Management cost (Salaries of executive management, Temporary infrastructure cost)
  • Cost estimation techniques
    • Bottom up
    • Analogous
    • Parametric
    • Three-point
  • Project budget involves 3 types of buffers and is represented using an S-Curve diagrammatically.
  • Activity level buffer
  • Cost estimate level buffer (Contingency buffer, when added yields the cost baseline)
  • Management buffer (Reserves kept outside the cost baseline and project manager doesn’t have access to it.
  • EVM –
    • Involves Earned Value (EV), Planned Value (PV) and Actual Cost (AC)
    • Variances – Schedule Variance SV = EV – PV and Cost Variance CV = EV – AC
    • Performance Indices – Schedule Performance Index SPI = EV/PV and Cost Performance Index = EV/AC
  • Forecasts – 4 different scenarios
    1. No pattern – EAC = AC + ETC (judgmental)
      • ‘Sunk costs’ + revised future costs
    2. Remaining project executed as planned – EAC = AC + (BAC- EV)
    3. Remaining project as per current CPI – EAC = BAC/CPI
    4. Remaining project affected by CPI and SPI
      EAC = AC + (BAC-EV)/(CPI*SPI)
  • TCPI = (BAC-EV)/(BAC-AC) or (BAC-EV)/(EAC-AC)

Dependencies

  • Hard
    • None
  • Soft
    • Inputs to 7.2 (Estimate cost)
    • Output of 7.3 (Determine budget)

Process flows

  • Develop schedule (Schedule baseline) à Estimate cost
  • Develop schedule (Schedule baseline) à Many other process including risk identification
  • Estimate cost (Cost estimate) à Estimate activity resources

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