Sathish Chandramouli: 7) COST Management

| COST Management

sunk cost – cost already incurred in the past and cannot be recovered, do not consider anymore
opportunity cost – difference in value between one path vs alternative (= 100% of value of next best alternative)
value analysis/ engineering – cost reduction without affecting the scope
Benefit Cost Analysis (BCA) / Cost Benefit Analysis (CBA) – determine feasibility, bigger benefit/cost ratio (BCR)
Payback Period – the length of time to recover the investment
Return on Investment (ROI) – the efficiency of investment = (Gain-Cost)/Cost
Time Value of Money – Present Value (PV) = value / (1+interest rate)*year, Future Value (FV) = value * (1+interest rate)*year
Net Present Value (NPV) = PV of cash inflows – PV of cash outflows (cost)
funding for project: self-fund, funding with equity, funding with debts
discount rate - rate used to calculate present value of expected yearly benefits and costs

Project Cost Management PITTOs:

Processes	Inputs	Tools & Techniques	Output
Plan Cost Management	Project Management Plan Project Charter Enterprise Environment Factors Organization Process Assets	Expert Judgment Analytical Techniques Meetings	Cost Management Plan
Estimate Costs	Cost Management Plan Human Resource Management Plan Scope Baseline Project Schedule Risk Register Enterprise Environment Factors Organization Process Assets	Expert Judgment Analogous Estimating Parametric Estimating Three Point Estimates Reserve Analysis Cost of Quality Project Management Software Vendor Bid Analysis Group Decision Making Techniques	Activity Cost Estimates Basis of Estimates Project Document Updates
Determine Budget	Cost Management Plan Scope Baseline Activity Cost Estimates Basis of Estimates Project Schedule Resource Calendars Risk Register Agreements Organization Process Assets	Cost Aggregation Reserve Analysis Historical Relationships Funding Limit Reconciliation Expert Judgment	Cost Baseline Project Funding Requirements Project Document Updates
Control Costs	Project Management Plan Project Funding Requirements Work Performance Data Organization Process Assets	Earned Value Management Forecasting To Complete Performance Index (TCPI) Performance Reviews Project Management Software Reserve Analysis	Cost Forecasts Change Requests Work Performance Info Organization Process Assets Updates PM Plan Updates Project Document Updates

Plan Cost Management

The Cost Management Plan establishes: i) level of accuracy and level of precision, ii) unit of measurement, iii) WBS procedure links (to control account (CA)), iv) control threshold, v) earned value rules of performance, reporting, funding and processes
Life cycle costing = total cost of ownership : production cost, running and maintenance cost, etc.

Estimate Costs

Variable costs - costs change with the amount of work, e.g. hourly consultants
Fixed costs - costs that are constant, e.g. equipment leases
Direct costs – directly attributed to the project
Indirect costs – shared costs like AC, lighting, etc.

Analogous Estimating (Top Down Estimate) – compare to a similar project in the past (an estimating heuristic/rule of thumb)
Parametric Estimating – use a parameter and repetitive units of identical work
Bottom-up Estimating – detailed estimates of each individual activity from historical data, more accurate and time-consuming

Activity Cost Estimates may include indirect cost and contingency reserves
usually in a range of values
Basis of Estimates - detailed analysis on how the cost estimate was derived (assumptions, constraints, possible range (+/-15%), confidence level of final estimate)

Determine Budget

Budget is more about when to spend money
Historical Relationships - analogous/parametric estimation
Reserve Analysis – addresses Management Reserve (unknown unknowns) and Contingency Reserve (known risks) [not included in calculation of earned value management]
Funding Limit Reconciliation – addresses variance between funding limit (e.g. monthly or yearly limit) and planned expenditure, may require rescheduling of work to level of the rate of expenditure
Value Engineering – to improve quality/shorten schedule without affecting the scope
Project Budget = Cost baseline (the approved time-phased budget) + Management Reserve
when management reserve is used during project execution, the amount is added to the cost baseline
S-curve : total project expenditure over project lifecycle

Control Costs

Estimate at Complete: 1) new estimate required (original flawed), 2) no BAC variance, 3) CPI will continue, 4) sub-standard cost/schedule will continue
TCPI: >1 not enough funding remain (over budget), <1 more fund available than needed (under budget)

Discrete Efforts – describes activities that can be planned/measured for output, including Fixed Formula (activity given a % of budget of work package at start and earn the remaining when completed, e.g. 50/50, 20/80 or 0/100), Weighted Milestone (earn value for milestones of deliverables of the work package), Percentage Complete, Physical Measurement
Apportioned Efforts – describes work that has a direct/supporting relationship to discrete work, e.g. testing, pm activities, calculated as % of the discrete work
Level of Efforts (LOE) – describes activities without deliverables, e.g. troubleshooting, assigned the earned value as scheduled, without schedule variance but may have cost variance

e.g. perform Control Cost weekly during execution where money is spent fastest
Variance Analysis – to check against the baseline for any variance
SPI at end of project must be 1
SPI is NOT telling much information to whether the project is on schedule as the Critical Path must also be investigated to get a meaningful picture

Sathish Chandramouli