Assignment Cost management

Cost Management 235-AAH-CH

Professor: Behn Nikkhah

CLASS 3&4

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Cost Estimation

Estimating project costs are important because:

• Can be used in feasibility study before starting the project.

• It can facilitate decisions regarding project financing and funding.

• It provides a standard against which actual costs incurred during the execution can be compared.

• It gives the project manager a framework to allocate scarce resources throughout the project.

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Cost Estimation

This is a process of estimating the cost of the resources required for each scheduled activity.

It is important to be certain to include all the costs required to complete the work of the project.

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Estimate Costs Inputs

• Project Management Plan (Cost management plan, Quality Management Plan, Scope baseline)

• Project Documents (Lessons learned register, Project schedule, resource requirements, Risk register)

• Enterprise environmental factors

• Organizational process assets.

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Estimate Costs Inputs Scope Baseline:

• Project scope statement • WBS • WBS dictionary

Project scope statement is a document that includes key deliverables, constraints, assumptions, etc.

Constraints such as limited budget for the project can be find in this document. There might be other constraints such as delivery date that can impact the cost.

Project assumptions regarding costs might include information regarding indirect costs in the estimate.

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Estimate Costs Inputs

The WBS serves as the basis for estimating costs, as it includes all deliverables and the control accounts that are typically established at the work package level.

The WBS dictionary describes the deliverables, work components, and other elements of the WBS.

All these information can be helpful in estimation of the costs.

For example if one of the deliverables is to get licenses you need to see that as additional expenses to fulfill in the estimation.

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Estimate Costs Inputs

The Project schedule along with the resource requirements for each activity are key inputs in estimating costs of the project.t

You need to be aware of the duration as it can affect costs.

For example, you must account for costs such as interest charges in a financed work of the project.

Another example is fluctuation in costs that can occur due to seasonal or holiday demands.

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Estimate Costs Inputs

The risk register contains the response plans, particularly for those risks with negative impacts to the project.

When developing project cost estimates, you should consider the cost of implementing risk response plans.

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Estimate Costs Inputs

The enterprise environmental factors such as market conditions, exchange rates and inflation are examples to be considered in the project costs estimation.

The organization process assets such as lessons learned on previous projects of similar scope and complexity can be useful in determining estimates for the current project.

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Tools and Techniques to Estimate Costs

The majority of these are also tools and techniques of the estimate activity durations process used to determine schedule estimates: • Expert judgement • Analogous estimating • Parametric estimating • Bottom-up estimating • Three-point estimating • Reserve analysis • Project management information system • Decision making (voting)

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Cost Estimation The total project cost is often estimated during the initiating phase of the project and be indicated in the project charter.

However detailed plans are not usually prepared at the initiating phase.

The detailed estimation can include the following elements: Labor costs Material costs Equipment costs Facilities costs Subcontractor costs Travel costs Reserve

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Labor costs

These are the estimated costs for the various types of human resources who are expected to work on the project

Example, painters, developers, designers, general labor.

The labor costs are based on the estimated work time (not necessary activity duration)

Activity may have one day as its duration, but it requires 2 hours of work.

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Material costs

It includes the estimated costs of materials that the project team or contractors need to purchase for the project, such as paint, lumber, pipes, cables, paper, food, software.

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Equipment costs

A project may need a piece of equipment to be purchased.

Equipment can include items such as computers and machinery.

For example, a project of upgrading a manufacturing facility may include the purchase of new machinery

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Facilities costs

Some projects may need special facilities or additional place for the project team, for safety and security reasons, to store materials, to assemble, or to test the project deliverables or final product.

For example cost of renting a place to store materials required for the project is a facility cost.

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Subcontractors costs

In a project your project team may not have expertise or resources to do certain project tasks. In such case you may outsource some of the work to subcontractors or consultants to perform those activities.

For example you can have a subcontractor for a catering activities.

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Travel costs

If travel other than local travel is required during the project, the costs of airfare, lodging, and meals need to be seen under this category.

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Reserve

Contingencies to cover unexpected situations that may come up during the project. It will be discussed later.

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Cost Estimation Now the question is “who is responsible for performing cost estimation?”

It is a good practice to assign the person who will be responsible to do a task estimate the costs associated with it, as it can generating commitment from the person and avoids the bias of having one person doing all estimations.

In large projects which may take several years, it is not practical and possible to have each person or team estimate activity costs.

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Estimate Activity Costs The estimated costs for an activity should be reasonable and realistic.

If estimates become over conservative, the total costs for the project is probably more than the budget of the sponsor or customer.

In contrast, being very optimistic may cause cost overrun and unexpected expenditure come up.

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Estimate Activity Costs In large project it is more practical to have contractors or departments who are responsible for a work package to estimate the costs of the work.

If an organization or contract has performed similar projects in the past and has kept records of the actual costs, these historical data can be used in cost estimation.

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Determine Project Budget

Cost estimation and project budgeting are inseparably linked.

The project budget is determined by aggregating the estimated costs for all the activities.

The project budgeting process involves two steps:

• Determine the total budgeted cost • Develop a time-phased budget

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Develop the total budgeted cost

The total budgeted cost is the aggregate amount of the estimated costs of all the specific activities to perform and complete the project (based on a WBS)

This is also referred to as budget at completion (BAC).

WBS with work package budgets

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Develop Cumulative Budgeted Cost

Once you determine the BAC, the second step is to distribute budgeted cost for each work package over the expected time span of its work package.

By performing that, a time-phased budget is created so that it can be determined how much of the budget should have been spent at any point in time (Planned value in EVM)

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Example: Network Diagram

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Example: distribute the budget

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Example: Budgeted cost by period for the packaging machine

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Develop Cumulative Budgeted Cost

Once you determine the BAC, the second step is to distribute budgeted cost for each work package over the expected time span of its work package.

By performing that, a time-phased budget is created so that it can be determined how much of the budget should have been spent at any point in time (Planned value in EVM)

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Cumulative budgeted cost curve With the planned value (cumulative budget cost), PV curve can be drawn to illustrate budgeted expenditure over the duration of the project

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The importance of project cost management Two of the most important documents project managers prepare for any project are the project schedule and project budget.

These two documents will be used throughout the executing and monitoring and controlling process

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Cost Baseline

The cumulative budgeted cost for the entire project provide a baseline against which actual cost and work performance can be compared during the project.

For big projects that involves lots of activities, project management software assist the project budgeting.

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Actual Cost

To record and keep track of actual cost on a project, it is necessary to establish a system to collect data on costs expended on a regular and timely basis.

In many project weekly timesheets are used to collect actual labor hours.

Workers working on the project fill it out with the number of the work packages on which they worked and the amount of hours they spend on each.

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Committed Costs

Committed costs are amount of money that have been beholden for an item that has been ordered or purchases but not yet paid for.

Committed costs are not available to be spend elsewhere on the project as they will be needed later.

For example you hire a contractor to fix your home plumbing for $2,000. you have committed $2,000, even though you may not actually pay until the work is finished.

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Committed Costs

Committed amount need to be set aside and be treated in a special way.

To permit a realistic comparison of actual cost to cumulative budgeted cost (PV), percentage of committed costs should be assigned to actual cost while the work is being performed (as it is like progress payments), rather than waiting till it is finished and convert it to actual costs.