Project Management
Michelle_MichyDiploma of Project Management
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Manage Project Cost BSBPMG514
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Unit Outline
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This unit describes the skills and knowledge required to identify, analyse and refine project costs to produce a budget, and to use this budget as the principal mechanism to control project cost.
This unit applies to individuals responsible for managing and leading a project in an organisation, business, or as a consultant.
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Unit Structure
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There are three topics in this unit:
Topic 1 - Determine project costs
Topic 2 - Monitor and control project costs
Topic 3 - Complete cost-management processes
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Topic 1 Determine Project Costs
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What is Cost and Project Cost Management?
Cost is a resource sacrificed or foregone to achieve a specific objective, or something given up in exchange.
Costs are usually measured in monetary units, such as dollars.
Project cost management includes the processes required to ensure that the project is completed within an approved budget.
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Project Cost Management Processes
Cost estimating: Developing an approximation or estimate of the costs of the resources needed to complete a project.
Cost budgeting: Allocating the overall cost estimate to individual work items to establish a baseline for measuring performance.
Cost control: Controlling changes to the project budget.
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Project Cost Management
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Basic Principles of Cost Management
Most members of an executive board have a better understanding and are more interested in financial terms than other elements of the project, so project managers must speak their language.
Profits are revenues minus expenses.
Life cycle costing considers the total cost of ownership, or development plus support costs, for a project.
Cash flow analysis determines the estimated annual costs and benefits for a project and the resulting annual cash flow.
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Basic Principles of Cost Management
Tangible costs or benefits are those costs or benefits that an organisation 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.
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Inputs to the budget
The PMBOK Guide lists the following as inputs to determining the project budget:
Cost management plan
Scope baseline including scope statement and WBS
Activity cost estimates
Basis of estimates
Project schedule
Resource calendars
Risk register
Agreements
Organisational process assets
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Cost Estimating
Project managers must take cost estimates seriously if they want to complete projects within budget constraints.
It’s important to know the types of cost estimates, how to prepare cost estimates, and typical problems associated with project cost estimates.
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Processes to estimate costs to enable project budget
As part of the estimation process, the PMBOK Guide refers to a range of ‘organisational process assets’ that need to be considered:
Financial control procedures
Historical information
Financial databases to support financial analytical techniques
Existing formal and informal cost estimating and budgeting-related policies, procedures and guidelines
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Cost Management Plan
A cost management plan is a document that describes how the organisation will manage cost variances on the project.
A large percentage of total project costs are often labour costs, so project managers must develop and track estimates for labour.
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Activity 1.1
Explain the appropriate budgeting processes and techniques you will use for your project
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Cost Estimation Tools and Techniques
Basic tools and techniques for cost estimates:
Analogous or top-down estimates: Use the actual cost of a previous, similar project as the basis for estimating the cost of the current project.
Parametric estimating: Uses project characteristics (parameters) in a mathematical model to estimate project costs.
Bottom-up estimates: Involves estimating individual work items or activities and summing them to get a project total.
Three-point estimating: This technique uses three estimates to define a range for an activity’s cost: Most likely –Optimistic –Pessimistic
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Cost Estimation Tools and Techniques
Basic tools and techniques for cost estimates (continued):
Reserve analysis: Contingency reserves are included in cost estimates to account for cost uncertainty.
Project management software: Software applications, computerised spreadsheets, simulation and statistical tools are useful tools in cost estimating.
Vendor bid analysis: This technique considers bids from vendors as input to the cost estimate.
Group decision-making techniques: Key stakeholders, as a group, work through decision-making technique(s) as input to the cost estimates.
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Introduction to three-point estimating
https://www.youtube.com/watch?v=CsJeCOzsJVs&feature=youtu.be
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Activity 1.2
Identify the tools and techniques for the budgeting process relevant to your project and explain how you plan to use these tools and techniques to support the costing of your project
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Typical Problems with Cost Estimates
Developing an estimate for a large software project is a complex task that requires a significant amount of effort.
People who develop estimates often do not have much experience.
Human beings are biased toward underestimation.
Management might ask for an estimate, but really desire a bid to win a major contract or get internal funding.
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Cost Estimate
Before creating an estimate, know what it will be used for, gather as much information about the project as possible, and clarify the ground rules and assumptions for the estimate.
If possible, estimate costs by major WBS categories.
Create a cost model to make it easy to change and document the estimate.
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Relationship between the WBS and project budget
From the WBS, you then identify the task requirements from a cost perspective. Costs for task completion include the following:
Human labour
Materials
Equipment and machinery
Technology
Facilities
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Activity 1.3
Draft a list of potential resource requirements for deliverables from the WBS for your project
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Outputs of cost estimates
Activity cost estimates
These are quantitative assessments of the anticipated costs to complete project work. Cost estimates can be based on resource requirements including:
Direct labour
Materials
Equipment
Services
Facilities
IT
Special categories
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Outputs of cost estimates
Basis of estimates
The PMBOK Guide outlines supporting detail for activity cost estimates as:
Documentation of the basis of the estimate (how it was developed)
Documentation of all assumptions made
Documentation of any known constraints
Indication of the range of possible estimates
Indication of the confidence level of the final estimate
Project documents updates
Project documents such as the risk register may need to be updated following cost estimates.
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Cost Budgeting
Cost budgeting involves allocating the project cost estimate to individual work items over time.
The WBS is a required input for the cost budgeting process because it defines the work items.
Important goal is to produce a cost baseline:
A time-phased budget that project managers use to measure and monitor cost performance.
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Developing a project budget
There is a range of budgeting formats to use in developing your project budget:
Traditional
Xero-based
Program
Top-down
Bottom-up
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Activity 1.4
Develop project budget with estimated costs for resources identified from Activity 1.3
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Cost Management Plan
The cost management plan describes how project costs will be planned, structured and controlled.
Project Managers needs to consider the following questions:
What methods you used when you estimated the cost of the project, for example historical or zero based?
How budget changes will be communicated and carried out?
How you will summarise and identify the costs of the project including variance to actual and earned value?
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Cost Management Plan
Who has the authority and responsibility for payments and any changes to the project budget?
Who has the authority to use the contingency and reserve funds for the project?
How you will report variations to the budget or cash flow and the actions that will be taken?
Who has the responsibility for the development and distribution of budget reports not included in the communications plan?
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Activity 1.5
As part of your cost management plan, identify the key stakeholders and their delegated authority in the ongoing management of cost for your project
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Topic 2 Monitor and Control Project Costs
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Cost Control
Project cost control includes:
Monitoring cost performance.
Ensuring that only appropriate project changes are included in a revised cost baseline.
Informing project stakeholders of authorised changes to the project that will affect costs.
Many organisations have problems with cost control.
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Key components to control cost
The PMBOK Guide identifies two key components of the project management plan that are used to control cost:
Cost baseline – compared with actual results to determine if a change, corrective action, or preventive action is necessary.
Cost management plan – describes how project costs will be managed and controlled.
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Activity 2.1
Identify and explain details for the financial management processes and procedures used to monitor your project by completing the table below
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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 organisations around the world are using EVM to help control project costs.
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Earned Value Management (EVM)
The planned value (PV), formerly called the budgeted cost of work scheduled (BCWS), also called the budget, is that portion of the approved total cost estimate planned to be spent on an activity during a given period.
Actual cost (AC), formerly called actual cost of work performed (ACWP), is the total of direct and indirect costs incurred in accomplishing work on an activity during a given period.
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Earned Value Management (EVM)
The earned value (EV), formerly called the budgeted cost of work performed (BCWP), is an estimate of the value of the physical work actually completed.
EV is based on the original planned costs for the project or activity and the rate at which the team is completing work on the project or activity to date.
It is also important to monitor:
the schedule variance (SV) = (EV) – (PV)
the cost variance (CV) = (EV) – (AC)
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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.
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To-complete performance index (TCPI)
TCPI is the calculated projection of cost performance to be achieved for the remaining work to meet specified management goals (the BAC or EAC). Where the BAC is no longer realistic, then it will be superseded by the EAC. So, The PMBOK Guide shows this with the formula:
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Performance reviews
Compare cost performance over time, schedule activities or work packages. This will show if activities or WBS components are running under (ahead) or over the budget (behind). If EVM is being used the following is determined:
Variance analysis is the explanation for cost, schedule and variance at completion.
Trend analysis method looks at the performance of the project over a period of time, determining if it is improving or deteriorating.
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Using Software to Assist in Cost Management
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
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How do managers use budgets?
Record actuals
Calculate variances
Decide which variances to investigate
Feedback and remedial action
Managers coordinate
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Implementing and monitoring budgets
If used systematically and carefully by managers they can also powerful motivational and communication tools.
If used poorly, budgets can have a very negative effect on results, motivation and morale!
How do managers monitor budgets?
No one best method
Depends on organisational context
Management style
Management structure
Productive processes
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Possible causes of variances
original estimates not being revised
changes in market and/or vendor prices
mathematical errors
tasks having to be reworked
differences in costs of resources which need to be replaced
the specification being revised (up or down)
rescheduling of work outside normal hours (overtime and/or penalty rates)
errors in omitting costs from the outset
change in management resulting in priorities impacting the project
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4 Top Project Financial Management Tips – Project Management Finance
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Activity 2.2
Select two of the cost analysis methods and tools listed below that may be used to identify cost variations and explain how you would use them to monitor and control cost
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Activity 2.3
Explain the financial reports required for monitoring project costs
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Topic 3 Complete Cost-Management Process
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Financial completion
Projects are about achieving certain goals using limited and predetermined resources within a set period of time.
Financial records must be finalised to ensure that:
Financial data have been maintained in accordance with your project plans and according to any guidelines or standards you have been asked to follow.
The data are in a state that will make it possible to accurately compare planned and actual expenditure.
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Project Finances - Finalisation
You will also need to reconcile all the figures and controls. Check that:
payments have been made and completed
the available budget correctly reflects the commitments and payments made
whether commitments match to payments
whether there are any "unused" commitments that can be cancelled.
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Activity 3.1
Provide evidence that you have conducted appropriate activities to signify financial completion
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Financial completion - cost control
Cost control reports include the following issues:
Reports should be relevant to the project’s cost control needs of managers and stakeholders.
Reports need to be timely - produced on time and often enough to enable preventative or corrective action of potentially serious cost variances.
Reports need to be communicated to interested parties ie project stakeholders.
Reports should be treated as the basis for proactive action not as historical documents produced for interest only
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Financial review
As part of the finalisation processes the project manager should review the methods utilised throughout the project to determine if they were effective in managing project cost. When conducting this review you should also answer the following questions:
How effective were the approaches used during the project?
How close were your original estimates?
Were there any major differences in estimates to actual?
Were your payment processes adequate?
You should also consider whether or not the budget allocated to the project was sufficient.
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Financial review
You also need to consider the following:
Did you have to go back and ask for more money during the project?
Did you have too much left at the end?
What were the reasons for these variances?
Were you too pessimistic or optimistic in your estimations?
Did you ask for twice as much money ‘just in case’?
Did you deliberately underestimate the project?
How much variation was there between what was estimated, what was required and what was eventually used?
Did you get value for money throughout the project?
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Review and record lessons learned
It is important to debrief and document what has been learnt from the project
This is then filed and referred too for future projects which feeds back into the continuous cycle process
This is part of the organisational process assets which it considers as a valuable source for future use
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Lessons Learned
Consider the following questions as part of project review in documenting lessons learned for future projects:
What mechanisms exist to enable you to capture lessons learned relevant to cost management for your project?
How does your organisation ensure that key stakeholders are involved in collecting information for cost management lessons learned?
How does your organisation ensure that lessons learned from previous projects’ cost management are accessible for future project teams?
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Review cost-management issues and document improvements
Consider the following questions as part of project review in documenting lessons learned for future projects:
What mechanisms exist to enable you to capture lessons learned relevant to cost management for your project?
How does your organisation ensure that key stakeholders are involved in collecting information for cost management lessons learned?
How does your organisation ensure that lessons learned from previous projects’ cost management are accessible for future project teams?
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Activity 3.2
Explain two areas of the project that would be analysed as part of the post-implementation review to contribute to the lessons learned for the project’s cost management
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Project Cost Management
https://www.youtube.com/watch?v=EM2qkN7QRMk&feature=youtu.be
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Summary
Project cost management processes include estimating costs and determining budget and control costs. This should be expanded to ensure that financial closure activities are also performed.
To manage the project budget PM must be knowledgeable about internal cost management and project accounting policies and processes.
To prepare the detailed project budget it is necessary to understand all the cost elements of the project. It is critical to include both direct and indirect costs.
Project budget baseline should be updated after any approved change request. Remember to manage stakeholder expectations closely and diligently monitor and control your budget to ensure project success.
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Thank you
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