Earn Value Managment : Cost Management

Earn Value Management determine the health of the project. 3 things are the main component of  EVM.

1.Status - Delay of the project
2.Progress- run rate of the project
3.Forecast

In this every thing is calculated in Money

Three Key Variables
Planned Value :  PV - Budgeted cost for the work that should be done at a given time.
Earned Value :  EV :  Budgeted amount for the work that has been accomplished ( measured at the same point in time as PV)
Actual cost :  AC : Actual or total cost incurred in doing the work thus far.

Example of Earned Value Management 

Project :  Build a privacy fence at a cost of $100 per section

Today Value Acronym Plan = 6 section $600 Planned Value (PV) Built only 5 section $500 Earned Value (EV) Actual Cost $650 Actual Cost (AC)
Cost Variance :  EV less AC = 500-650=$150 (cost overrun) Schedule variance :  EV less PV = 500-600=-$100 ( behind schedule )

BAC - Budgeted at completion
VAC- Variance at completion

Cost Management 7.3 Control Costs

1. Cost Management 7.1 Estimate costs

2. Cost Management 7.2 Determine Budget

3. Cost Management 7.3 Control Costs

Cost control is part of integrated change control. Effective cost control requires management of the approved cost performance baseline (often simply called the cost baseline or approved budget) and any changes to that baseline. Cost control includes the following:

·         Influencing the factors which create changes

·         Ensuring that change requests are acted on in a timely manner

·         Managing the change Process

·         Keeping costs within authorized funding

·         Detecting and understanding cost variances

·         Recording all changes

·         Preventing inappropriate changes

·         Informing stakeholders of changes

                               -    Bringing expected cost overruns within acceptable limits

Control Costs
Inputs	Tools	Inputs
1.       Project management Plan 2.       Project funding requirements 3.       Work performance information 4.       Organizational Process assets	1.       Earned value management 2.       Forecasting 3.       To-complete Performance index 4.       Performance reviews 5.       Variance analysis 6.       Project management software	1.       Work performance measurements 2.       Budget forecasts 3.       OPA updates 4.       Change requests 5.       Project management Plan updates 6.       Project document updates

Four Key inputs for Control Costs:

1.       Project Management Plan: Contains the following information used to control costs:

·         Cost performance baseline: The baseline (plan) is compared with actual results to determine if changes, preventive actions, or corrective actions are necessary.

·         Cost management plan: Describes how project costs are to be managed and controlled.

2.       Project Funding Requirements: Described previously in this site, Section 7.2.3.2.

3.       Work performance information: Includes the following status information:

·         Deliverable completed or partially completed

·         Costs authorized vs. costs incurred (plan vs. actual)

·         Estimates for completing the work (forecasts)

·         Percent physically complete for work in progress

4.       Organizational Process Assets: The following organizational process assets may affect cost control:

·         Formal and informal cost control procedures and guidelines

·         Cost control tools

·         Monitoring and reporting methods

Six Key Tools for Control Costs:

1.       Earned Value Management: Earned value is a method of performance measurement that provides current cost and schedule status at regular intervals. This site describes earned value as it relates to current status (Tool #2, forecasting, will address the forecasting portion of the technique). See course slides #98 through#120 for coverage of what you must know for the exam.

2.       Forecasting: Work performance information through each successive reporting period is used to predict future performance on the project, in this site and course slides referenced above.

3.       To-Complete Performance index: Calculates the cost performance (CPl) that must be maintained to achieve a performance goal. Usually the preference is to maintain the original budget (finish at the BAC) or in some cases performance may have deteriorated to the point that the current EAC becomes an acceptable goal. The course slides referenced above show examples.

4.       Performance Reviews: Regular meetings to review and assess cost performance information. One or more of the following techniques are normally employed:

·         Variance analysis: Planned versus actual performance in the areas of cost and schedule.

·         Trend analysis: Examining performance over time and projecting to the future to determine whether performance is improving, remaining the same, or deteriorating-

·         Earned value: A special technique that accomplishes both variance analysis as well as trend analysis (CPl, SPI).

5.       Variance Analysis: Variance analysis determines the magnitude of cost variances and then determines whether corrective or preventive actions are needed. In many organizations, acceptable thresholds are established to decide whether a variance is minor or major. The range of acceptable variance usually grows more narrow as a project nears completion.

6.       Project Management Software: Automates the analysis of data by tracking the values for PV, EV, and AC.

Six Key Outputs for Control Costs:

1.       Work Performance Measurements: This involves the actual documentation and communication of calculated measurements such as CV, SV, and CPR. This information is documented and communicated to appropriate stakeholders.

2.       Budget Forecasts: calculations such as EAC should be recorded and communicated to stakeholders.

3.       Organizational Process Assets Updates: organizational process Assets that may be updated as a result of cost control include:

·         Causes of variances

·         Corrective actions chosen and the reasons

·         Other lessons learned as a result of cost control

4.       Change Requests: Change requests may lead to changes in the budget (increase or decrease) and, as usual, change requests must be processed using integrated change control.

5.       Project Management plan updates: components of the project management plan that may be updated as a result of cost control include:

·         Cost performance baseline: The baseline (plan) is compared with actual results to determine if changes, preventive actions or corrective actions are necessary. In some cases, cost variances are so severe that the baseline must be extensively revised to produce a realistic budget.

·         Cost management plan: Describes how project costs are to be managed and controlled

6.       Project Document updates: Documents that may be updated include:

·         Cost estimates

·         Basic of estimates

Cost Management 7.2 Determine Budget:

1. Cost Management 7.1 Estimate costs

2. Cost Management 7.2 Determine Budget

3. Cost Management 7.3 Control Costs

Cost budgeting involves aggregating estimated cost estimates for all individual activities or work packages so that a cost baseline can be established for measuring performance. The baseline includes authorized budgets and contingency reserves, but excludes management reserves (the extra amount for "unknown unknowns").

Determine Budget
Inputs	Tools	Outputs
1.       Activity cost estimates 2.       Basis of estimates 3.       Scope baseline 4.       Project schedule 5.       Resource calendars 6.       Contracts 7.       Organizational process assets	1.       Cost aggregation 2.       Reserve analysis 3.       Expert judgment 4.       Historical relationships 5.       Funding limit reconciliation	1.       Cost performance baseline 2.       Project funding requirements 3.       Project document updates

 

Seven Key inputs for Determine Budget:

1.       Activity Cost Estimates: Cost estimates for each activity within a work package are aggregated so that the cost of each individual work package is known. Work package estimates can then be aggregated at the control account level and so on.

2.       Basis of Estimates: Described in this side (includes scope, deliverables, how the estimate was created, assumptions, constraints, and an estimated range of possible outcomes). This information should also address whether indirect costs are included in the budget.

3.       Scope Baseline: The following three items form the scope baseline and contain information that is relevant to establishing the cost baseline.

·         Scope statement: The scope statement is relevant to budgeting if it identifies any constraints on the expenditure of money (such as a fiscal year that constrains when certain funds can be spent).

·         WBS: Provides a structure to organize the cost estimates into useful categories (cost accounts or control accounts).

·         WBS dictionary: Provides the detailed information of what is needed to produce the deliverables for each work package.

4.       Project Schedule: The schedule must be known to establish when specific costs will be incurred.

5.       Resource Calendars: The availability of resources affects both the cost as well as the timing of the work. This was considered previously in this site, paragraph 6.3.3.4.

6.       Contracts: Provides information on costs incurred through outsourcing of portions of the work.

7.       Organizational Process Assets: The following organizational process assets may affect cost budgeting:

·         Formal and informal cost budgeting procedures and guidelines

·         Cost budgeting tools

·         Reporting methods

Five Key Tools for Determine Budget:

1.       Cost Aggregation: Described previously. Cost estimates are established for work packages and summarized at higher levels such as control accounts or the project total.

2.       Reserve Analysis: Also discussed under cost estimating, the course slides will show an example of how reserve analysis relates to the cost baseline (at the first output below, cost performance baseline).

3.       Expert Judgment: The use of appropriate subject matter experts to improve the accuracy of the budget.

4.       Historical Relationships: Described previously for duration estimating, this technique, formerly called parametric estimating (the use of mathematical correlations), is also used for cost estimating and budgeting. As before, parametric models are most accurate when:

a.       The historical information used to develop the information was accurate

b.      The parameters in the model are readily quantifiable

c.       The model is scalable (works well for small as well as large projects)

5.       Funding Limit Reconciliation: Some organizations "reconcile" funding expenditures to prevent large fluctuations in disbursements. In some cases, this process relies on tinkering with the timing of certain activities through the use of imposed date constraints.

Three Key Outputs for Determine Budget:

1.       Cost performance Baseline: The cost baseline is a time-phased budget used to measure and monitor cost performance. The baseline is developed by summing estimated costs by time period and displaying them (often in the form of an S-curve). Large projects may have multiple cost baselines. See Figure 7-6 on this site and Course Slides #94 through #97 for examples of an S-curve and the use of reserve.

2.       Project Funding Requirements: As mentioned above, funding is not always a smooth, continuous process. The availability of the funds usually occurs in increments and disbursements may not automatically be spread evenly. Many organizations attempt to smooth the process as much as possible.

3.       Project Document Updates: Documents that may be updated include:

·         Risk register

·         Cost estimates

·         Project schedule

Cost Management 7.1 Estimate costs

1. Cost Management 7.1 Estimate costs

2. Cost Management 7.2 Determine Budget

3. Cost Management 7.3 Control Costs

Cost estimating involves developing an estimate of the costs of all resources needed to complete the project. The resources that need to be estimated include labor, equipment, materials, facilities, services and any special categories such as contingency or an allowance for anticipated inflation.

The accuracy of estimates tends to improve as a project moves though its life cycle. For instance, an estimate during the initiating phase (known as a ROM or rough order of magnitude) may have a range of accuracy of -50% to +50%. Other ranges of accuracy that are used in some industries and have been tested in the past include:

·         Order of magnitude estimates: “Ballpark” estimates without detailed data, for example, analogous estimates. This estimate is similar to ROM mentioned in the previous paragraph. The range of accuracy is given as -25 to +75% and would be used for initiating or project approval.

·         Budget estimates: Based on slightly better data and used to establish initial funding during the early stages of planning. The range of accuracy is given as -10 to +25%.

·         Definitive estimates: Prepared dorm well defined, detailed data. A bottom-up estimate using estimates of WBS work packages is a common example of this kind of estimate. This estimate would be done in the latter stages of planning and be used to establish a cost baseline. Range of accuracy is -5 to +10%.

Finally, cost estimating potentially includes evaluating trade-offs among alternatives such as spending more money in the design phase to save money during production or operations.

Estimate Costs
Inputs	Tools	outputs
1.       Scope baseline 2.       Project schedule 3.       Human resource plan 4.       Risk register 5.       Enterprise environmental factors 6.       Organizational process assets	1.       Expert judgment 2.       Analogous estimating 3.       Parametric estimating 4.       Bottom-up estimating 5.       Three-point estimating 6.       Reserve analysis 7.       Cost of quality 8.       Project management estimating software 9.       Vendor bid analysis	1.       Activity cost estimates 2.       Basis of estimates 3.       Project document updates

Six key inputs for estimate costs:

1.       Scope baseline: The following three items form the scope baseline and contain information that is necessary for accurate cost estimating.

·         Scope statement: contains the product description, key deliverables, constraints and assumptions. For cost estimating, a decision must be made as to whether the estimates will include only direct costs or will also include indirect costs.

·         WBS: Provides a structure to organize the cost estimates into useful categories (cost accounts or control accounts).

·         WBS dictionary: Provides the detailed information of what is needed to produce the deliverables for each work package.

2.       Project schedule: cost estimates are closely related to what resources will be used and for how long (activity durations).

3.       Human resource plan: Cost estimates may be affected by personnel rates and any associated rewards programs. The HR plan also contains the resource calendar with a staffing plan. This plan provides estimated time frames for various resources.

4.       Risk register:  The risk register should be reviewed so that projected risk mitigation costs may be included in the cost estimates.

5.       Enterprise environment factors: For cost estimating purposes, environmental factors would include marketplace for any conditions (what products are actually available in the marketplace for any portions of the project that may be outsourced) and any commercial databases that contain cost estimating.

6.       Organizational process assets: The following organizational processes, policies, procedures and knowledge bases may affect cost estimating:

·         Cost estimating policies and templates.

·         Historical information about similar products that may help define cost estimates.

·         Lessons learned: This would include cost information from similar projects.

Nine key tools for estimate costs: 

1.       Expert judgment: Expert judgment, guided by historical information on similar project, is used to improve the accuracy of available estimating data. Expert judgment may also assist in choosing the most appropriate estimating method.

2.       Analogous estimating: Previously described as one of the tools for duration estimating, the technique is also used for estimating costs. Key points are:

·         Uses the actual costs from a similar project and adjusts the estimate according to whether the current project is expected to be harder or easier than the previous one.

·         Also called top-down estimating.

·         Done early in the project life cycle in most cases.

·         It is a form of expert judgment.

·         Less costly than other techniques but also less accurate.

·         Most reliable when:

o   The previous projects were similar in fact and not just in appearance.

o   The estimators have the needed expertise.

3.       Parametric estimating: mathematical modeling for the purpose of predicting project costs the models seek factors that are highly correlated, for example, dollars per square foot of living space in residential construction. Parametric models are most reliable when:

·         The historical information used to develop the information was accurate.

·         The parameters in the model are readily quantifiable.

·         The model is scalable (works well for small as well as large projects).

4.       Bottom-up estimating: Estimating the cost of individual work items and then “rolling up” or summarizing the estimates to get a project total. The most widely accepted technique uses the work packages as the “individual items”. As the items estimated get smaller, the estimates usually become more accurate but also more costly to develop.

5.       Three-point estimates: Used exactly in the same way that it was for duration estimates. Three-point or PERT estimates are useful when there is underlying uncertainty in the work. As before, optimistic, most likely and pessimistic estimates are used to calculate an average cost that considers the range of uncertainty in the estimates. The formulas are the same except that the estimates are for costs rather than durations.

6.       Reserve analysis: Cost estimates must consider potential risks in the estimates for individual activities. Extra money can be incorporated into the pan in several ways:

·         Place the money into the budget for an individual work package that is considered risky. This approach is for handling “known unknown,” is referred to as contingency reserve and the money is already in the cost baseline.

·         Place the money in a zero duration (fictitious) activity that is placed at the end of a path for a group of activities. Such activities can be placed at multiple points in the schedule as the planners feel is prudent.

·         Finally, the money may be a separately planned quantity that is not associated with specific work package. This approach is for handling “unknown unknowns,” i.g., situations that are difficult to predict. This amount of money id known as management reserve, is often a percentage of the estimated cost and is not the currently approved cost baseline.

The use of either type of reserve is intended to reduce the chance of a cost overrun and the topic is discussed further in the chapter on risk management.

7.       Cost of quantity: the cost of quality includes activities such as training and audits that are done as part of quality management (which will be covered in more detail in the chapter on quality).

8.       Project management estimates software: Facilitates rapid consideration of the cost estimates for various project scenarios.

9.       Vendor bid analysis: Applies to outsourced work using procurement management processes.

 

Two key outputs for estimate costs:

1.       Activity cost estimates: Quantitative assessments (usually expressed in units of currency) of the like costs of the resource needed to complete the project. Cost estimates may be improved though refinements during the project life cycle. Cost estimates should consider risks and should address the following areas: labor, materials, supplies and services, facilities, information technology and special categories such as inflation and cost reserve.

2.       Basic of estimates: Should include the following information:

·         Description of the work (usually WBS)

·         Basis of the estimate (how it was developed)

·         Assumptions and constraints

·         A range of possible results

·         Confident level (related to the range, i.e., a wide range indicates less confidence in the probability of a given outcome)

3.       Project document updates: documents that may be updated as a result of cost estimating include the risk register.