Project Management in The Information Age
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Post-Week-6-TheFinancialPlan.pdf
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, Project Management in the Information Age MASY1-GC1250-104
Dr. Chiji Ohayia, PMP, CSM, SAFe Agile
Today
• Review Previous Class • The Financial Project Plan
• Group Project Work /Class Exercise
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Process Groups and Knowledge Areas 3
Scope Management
Time Management
Cost Management
Quality Management
Human Resources Management
Communications Management
Integration Management
Risk Management Procurement Management Stakeholder Management
Process Groups What we need to
accomplish…
Initiating Planning Executing
Monitoring
And Controlling
Closing
Knowledge Areas
What we need to
understand…
Definition of Time Management
Project Time Management includes processes for managing the work of the project
so that the project may complete successfully, on time.
TIME MANAGEMENT
Sched ule Planni ng
Scope Defini tion
Scope Planning
Scope Definition
Activity Definition
Resource Planning
Activity Sequencing
Schedule Development
Activity Duration
Estimating
Cost Estimating
Cost Budgeting
Project Plan Integration
CORE PLANNING PROCESSES
Scheduling & Resource Planning
Predecessor Successor
A B (FS) FINISH-TO-STARTA must finish before B can start
A B (FF) FINISH-TO-FINISH A must finish before B can finish
(Bake Cake-> Decorate Cake)
Project Scheduling Dependencies
(Decorate Cake-> Deliver Cake)
Predecessor Successor
A B (FS) FINISH-TO-STARTA must finish before B can start
A B (SS) START-TO-START When A starts B can also start
A B (FF) FINISH-TO-FINISH A must finish before B can finish
(Bake Cake-> Decorate Cake)
(Decorate Cake-> Deliver Cake)
(Bake Cake-> Make Icing)
Project Scheduling Dependencies
Predecessor Successor
A B (FS) FINISH-TO-STARTA must finish before B can start
A B (SS) START-TO-START When A starts B can also start
A B (FF) FINISH-TO-FINISH A must finish before B can finish
A B (SF) START-TO-FINISH When A starts B can finish
(Bake Cake-> Decorate Cake)
(Decorate Cake-> Deliver Cake)
(Bake Cake-> Make Icing)
(Deliver Cake -> Bill Customer) (Legacy system cannot be eliminated until replacement system starts)
RA RE
Project Scheduling Dependencies
Three types of Dependencies
1. Mandatory dependencies – called hard logic. When a task must be completed in a certain order.
2. Discretionary dependencies – called soft logic, preferential logic. When you prefer a task to be accomplished in a certain order.
3. External dependencies – based on the needs of a party outside the project.
Project Scheduling Dependencies
Project Financial Plan
Project Management in the Information Age MASY1-GC 1250
Week 6
The Project Budget
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Process Groups and Knowledge Areas 12
Scope Management
Time Management
Cost Management
Quality Management
Human Resources Management
Communications Management
Integration Management
Risk Management Procurement Management Stakeholder Management
Process Groups What we need to
accomplish…
Initiating Planning Executing
Monitoring
And Controlling
Closing
Knowledge Areas
What we need to
understand…
Project Cost Management
• The planning and structure necessary to control the costs (expenses) of the project – Planning
– Estimating – Budgeting
– Funding – Managing
– Controlling
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The Preliminary Budget
• The preliminary budget is produced in the Initiation Phase
• It is a preliminary estimate of the total expenditures expected for the project – Labor, material, and equipment costs
• It serves as a basis to allocate monies to support the project
• At a Rough-Order-of-Magnitude (ROM)
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Developing the Preliminary Budget
• Estimate project costs using a combination of science, logic, common sense, and experience – Solicit the opinions and feedback of project
participants to get a broad spectrum of information, experience, and opinion
– Focus on the costs factors that depend on the needs of the specific project
– Refer to cost estimates of similar projects in the past that were accurate
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Estimate the Preliminary Expenses
• Estimate the expenses at the level of detail you understand – Provide an estimate for the entire project at a
high level
– State in clear terms that the preliminary expenses are ‘estimates’
– Reserve a detailed estimate for the project work until after the ‘Scope’ has been agreed to
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High-level Estimates
• Cost can be categorized as labor, material, capital, and other costs as appropriate – Labor…Labor rates
– Material…Vendor quotes – Equipment…Platform costs
– Other…Consultant fees or training costs
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The Basis for the Preliminary Estimates
• Identify fundamental assumptions used to develop, calculate, or explain the expense estimates – The basis for calculating the labor cost might
be a standard labor rate multiplied by staff hours
– The cost of hardware might be based on sizing need for storage and performance
– The cost of materials might be based on the number of square feet of wall surface to paint
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The Detailed Budget • The detailed project budget is produced in
the Planning Phase when more detail about the project is known
• It is more detailed than preliminary budget • Typical budget specific expenses
– Staff, consultants, materials, hardware, software, equipment, travel, training, and supplies
• It becomes the baseline for the ‘Execute’ and ‘Control’ phases of the lifecycle
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Developing the Detailed Budget
• Refer to the preliminary budget
• Refer to budget information for similar projects
• Identify detailed labor expenses – Associated with the workplan tasks
• Identify detailed material expenses – Associated with the tasks, activities, and phases
• Identify detailed ongoing operating expenses – Customer support or software licensing
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The Purpose of the Detailed Budget
• The detailed budget provides the project sponsor with a best estimate of how much the project will cost
• It helps manage expectations and gives the project sponsor information to develop a detailed cost/benefit for the project
• It provides a basis on which to establish the ‘baseline’ expenses
• Measures if a project is financially on track
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Line-item Budget Categories
• Salaries
• Fringe Benefits • Equipment • Hardware and Software
• Training and Travel • Materials and Supplies • Consultants
• Overhead costs (indirect costs)
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Project Cost Budgeting • Allocate the project cost estimates to tasks • The tasks are based on the WBS for the project
• The WBS represents Scope and its deliverables • Produce a cost baseline
• Establish a time-phased budget • Enable the project manager to
– Measure and monitor cost performance – Assess ‘actual’ to ‘plan’ variances
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Budget Techniques
• Analogous estimates – The actual cost of a previous, similar project as the basis – The use of expert judgment – Less costly but less accurate
• Top-down estimates – Start with a lump sum budget for the project – Assign estimates for each process as a whole
• Bottom-up estimates – Involves estimating individual activities and summing them – Parametric estimation may help here! – Can increase the accuracy of the cost estimate – Time intensive and expensive to develop
Budget Techniques
• Parametric-estimates – Take estimated specific costs and multiple by units of
use
– Business costs of goods and services
• Three-point estimation – Use optimistic, most likely and pessimistic estimates
– Apply the same formulas used for activity time estimation
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Budget Contingency Planning
• Assessing ‘unknowns’ is very important
• The ‘crises’ that are inherent and a regular part of any project will affect the bottom line
• The budget estimate should have reserves or “buffers” built-in
• Best practice for the overall reserves is 20-30 percent of the total project cost
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Cost Reserves
• Contingency reserves – For “known-unknowns” – Included in cost baseline
– Includes rework and money for handling risks
• Management reserves – For “unknown unknowns” – Not included in cost baseline
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The Budget Approval Process
• Approve as proposed…
• Approve with cuts… • Approve but delayed until funds are
available… • Approve but not funded…
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Cost Management
PROJECT COST MANAGEMENT
Project Management Knowledge Areas from PMBOK® Guide
Estimate Activity Costs Elements • Labor • Materials • Equipment • Facilities • Subcontractors
and consultants • Travel • Reserve
Good Practices • Have the person responsible
estimate costs • Use historical data to inform
current project
• Be reasonable and realistic • Estimate near-term activities
more accurately • Elaborate other costs as
additional information known
Consumer Market Study Project
Estimated Costs
Aggregate Total Budgeted Cost
• Establish a TBC for each work package
• Determine the process • Top-down • Bottom-up
• If sum of initial estimates exceeds sponsor budget, then reduce costs and recalculate
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Packaging Machine Project Aggregate Total Budgeted Cost
Develop Cumulative Budgeted Cost
• Distribute each total budgeted cost (TBC) over work package duration
• Create the time-phased budget
• Calculate cumulative budgeted cost • Provides a baseline against which actual
cost and work performance are measured
Packaging Machine Project Develop Cumulative Budgeted Cost
• Determine budgeted cost by period
• Graph the cumulative budgeted cost curve
Determine Actual Cost • Actual Cost
– Collect data regularly for funds actually expended
– Charge to work package numbers
• Committed Costs – Periodically assign portion of total cost to actual cost
– Include costs for items that will be paid for later
• Compare Actual Cost To Budgeted Cost – Calculate cumulative actual cost – Compare to cumulative budgeted cost
Packaging Machine Project Determine Actual Cost
• End of Week 8 • Planned cost =
$64,000
• Actual cost = $68,000
• Compare CAC with CBC
Determine Value of Work Performed
Example Project
• Paint 10 similar rooms
• Total budgeted cost of $2,000
• Budget is $200 per room
At Day 5
• $1,000 has been spent • 3 rooms have been
painted • Earned value = • 0.30 × $2,000 = $600
• Have expended $400 more than the Earned Value
Packaging Machine Project Determine Value of Work Performed
Analyze Cost Performance
• Four cost-related measures – TBC – total budgeted cost – CBC – cumulative budgeted cost
– CAC – cumulative actual cost
– CEV – cumulative earned value
• Use to analyze project cost performance • Plot CBC, CAC, and CEV curves on the
same graph – Reveal any trends toward improving or
deteriorating cost performance
Packaging Machine Project Analyze Cost Performance
Cost Performance Index
• Measure of the cost efficiency with which the project is being performed
• Cost performance index = Cumulative earned value/Cumulative
actual cost
CPI = CEV/CAC
Packaging Machine Project Cost Performance Index
End of Week 8 • $64,000 was budgeted • $68,000 was actually
expended
• $54,000 was the earned value of work actually performed
• CEV = $54,000 • CAC = $68,000
Determine CPI • CPI = CEV/CAC
= $54,000/$68,000
= 0.79
For every $1.00 actually expended, only $0.79 of earned value was received.
Cost Variance
• Indicator of cost performance • Difference between the cumulative earned
value of the work performed and the cumulative actual cost
• Cost variance = Cumulative earned value − Cumulative actual cost
CV = CEV − CAC
Packaging Machine Project Cost Variance
End of Week 8 • $64,000 was budgeted • $68,000 was actually
expended
• $54,000 was the earned value of work actually performed
• CEV = $54,000 • CAC = $68,000
Determine CV • CV = CEV − CAC
= $54,000 − $68,000 = −$14,000
The value of the work performed through week 8 is $14,000 less than the amount actually expended.
Estimate Cost at Completion
• Forecast what the total costs will be at the completion of the project or work package
• 3 different methods – FCAC = TBC / CPI – FCAC = CAC + (TBC − CEV) – FCAC = CAC + Re-estimate of remaining work
• Another method – TCPI = (TBC − CEV)/(TBC − CAC)
Packaging Machine Project Estimate Cost at Completion
End of Week 8 • $64,000 was budgeted • $68,000 was actually
expended
• $54,000 was the earned value of work actually performed
• CEV = $54,000 • CAC = $68,000 • CPI = 0.79 • TBC = $100,000
Determine FCAC • FCAC = TBC / CPI
= $100,000/0.79 = $126,582
• FCAC = CAC + (TBC – CEV) = $68,000 + ($100,000 – $54,000) = $68,000 + $46,000
= $114,000
• TCPI = (TBC – CEV)/(TBC – CAC) = ($100,000 − $54,000)/( $100,000 −
$68,000) = $46,000/$32,000 = 1.44
Control Costs • Analyze cost performance on a regular basis
– Determine which work packages require corrective action
– Decide what specific corrective action – Revise the project plan
• Evaluate negative cost variance • Take corrective actions
– Near term activities
– Activities with large cost estimate
• Reduce costs of activities
• Evaluate the trade-off of cost and scope
Manage Cash Flow • Ensure that cash comes in faster than it
goes out • Negotiate payment terms
– Provide a down payment – Make equal monthly payments
– Provide frequent payments
• Avoid only one payment at end of project
• Control outflow of cash
Cost Estimating for Information Systems Development
• Common errors in estimating costs – Underestimating the work time necessary to complete
an activity
– Requiring rework to meet the user requirements – Underestimating growth in the project scope
– Not anticipating new hardware purchases – Making corrections to flaws in excess of the reserve
planning
– Changing the design strategy
– Increasing resources to fast-track phases of the SDLC
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Project Costs • Planned Costs
– The detailed budget
• Actual costs – Costs that a project has actually incurred
• Cost Performance Index (CPI) – Ratio of budgeted to actual costs
• Cost variance – Difference between budgeted and actual
Management Cost and Control System
• Planning
• Work authorization and release • Cost data collection and reporting • Cost analysis
• Reporting
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Project Cost Management Specifics
• Labor rates by position and class
• Consumable materials • Supplies and services • Non-capital equipment
• Capital equipment • Vendor contracts • Cost plus
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Project Cost Management Processes
• Resource planning – Determine what resources and quantities of
them should be used (resource requirements) • Cost estimating
– Develop an estimate of the costs and resources needed to complete a project
• Cost budgeting – Allocate an overall cost estimate to individual
work items to establish a baseline to measure performance
• Cost control – Control changes to the project budget
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Processes to Validate the Costs
• Monitor the planned costs against the actual
• Ensure they are required and directly related to the project
• Do not rely solely on the enterprise accounting
• Ensure that a work authorization plan is in place
• Track labor expenses against plan • Establish a contingency reserve
Process to Monitor and Control Costs
• Earned Value Management (EVM) – An approach for analyzing the current health
of the project which can be used to predict whether the project will finish over or under budget and ahead or behind schedule
• Variance analysis • Performance reviews
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EVM – The Basic Variables
• Budget at Completion (BAC)
• Time-based variables: – Actual Cost
– Planned Value – Total budgeted cost of work scheduled to be completed as of measurement date
– Earned Value – Total budget cost of work actually completed as of measurement date
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EVM – Variance Variables
• Cost Variance (CV) = EV minus AC
• Schedule Variance (SV) = EV minus PV • Analyzing variances:
– Positive values are good – Negative values are bad
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EVM – Performance Indices
• Cost Performance Index (CPI) = EV / AC
• Schedule Performance Index (SPI) = EV / PV
• Analyzing performance indices: – Values > 1 are good
– Values < 1 are bad
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EVM – Forecast Variables
• Estimate at Completion (EAC) = BAC / CPI – Expected total cost of completing all work
based on spending to date, assuming same cost efficiency going forward
– There are different formulas for this!
• Variance at Completion (VAC) = BAC - EAC
• Estimate to Completion (ETC) = EAC – AC – Expected additional spending to complete all
work
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THANK YOU!
