Blog Project Management Cost Management – Part 2

Cost Management – Part 2

Project Cost Management II

This is in continuation of the article Project Cost Management I .This article will cover the remaining two processes of project cost management knowledge area.

  • Determine Budget
  • Control costs

Determine Budget

The Determine Budget process aggregates the cost estimates of activities and establishes a cost performance baseline for the project that is used to measure performance of the project throughout the remaining process groups. The authorized project includes only the costs associated with the project.
For example, future period operating costs are not project costs and therefore aren’t included in the project budget. The cost performance baseline is the total expected cost for the project when calculating a budget at completion value, using an earned value management technique. In earned value management (EVM) techniques, the cost performance baseline is also known as the performance measurement baseline (PMB).

Input Tools & Techniques Output
Cost Management Plan Expert Judgment Cost baseline
Project Schedule Reserve Analysis Project funding requirements
Scope Baseline Cost Aggregation Project  Document updates
Risk Register Funding Limit reconciliation
Basis of estimates Historical Relationships
Activity cost estimates
Resource Calendars
Agreements
Organizational Process Assets

Inputs of Determine Budget

The cost management plan input includes level of accuracy, rules of performance measurement (EVM rules), reporting Formats, process Descriptions, and additional detail like strategic funding choices and procedure for project cost recording. The cost management plan details how costs should be monitored and controlled throughout the life of the project.

Tools & Techniques of Determine Budget

This article will cover the following tools and techniques of the determine budget

Cost Aggregation

It is the summation of all the individual costs.

Historical Relationships

Tools and technique of estimate costs analogous and parametric estimates can be used to help determine total project costs. Actual costs from previous projects of similar size, scope, and complexity are used to estimate the costs for the current project. This is helpful when detailed information about the project is not available. Parametric estimates are quantitatively based and, can be calculated by multiplying the amount of time needed to perform an activity by the resource rate to determine total cost.

Reserve Analysis

In Figure 1.1 below there are 3 activities (lowest level), 2 work packages (with cost $350 and $200), 2 control accounts (with cost $550 and $600 constituting the project. The diagram clearly states the difference between contingency reserve and management reserve. Contingency reserve is known to the project manager and the team. It is assigned for known risks in the project. Management reserves are kept for any unknown risks.
Cost baseline = Project + Contingency Reserve (which is $ 200 in this case)

Total Budget = Cost baseline + Management Reserve (which is $ 150 in this case)

cost-1

Funding Limit reconciliation

Project funding requirements are derived from the cost performance baseline. The entire project fund is not given the very first day. This amount is periodic, incremental and may not be evenly distributed. Expenditure usually starts out slowly on the project and picks up speed with the project progress. Sometimes, the expected cash flows don’t match the pace of spending. Project funding requirements account for this by using a management reserve (usually a margin or percentage of the cost performance baseline) that’s released in increments with the project budget. Figure 1.2 shows the cost performance baseline, the funding requirements as steps in the figure, and the expected cash flows plotted on the S-curve. The difference between the funding requirements and the cost performance baseline at the end of the project is the management reserve.

cost-2

Figure 1.2

Important point: Cost performance baselines are displayed as an S curve. The reason for this is that project spending starts out slowly, gradually increases over the project’s life until it reaches a peak, and then tapers off again as the project finishes.

Outputs of Determine Budget

The goal of Determine Budget is to develop a cost performance baseline (an output of this process) for the project that you can use in the Executing and Monitoring and Controlling processes to measure performance. Project funding requirements describes the need for funding over the course of the project and can be derived from the cost performance baseline. Funding requirements can be expressed in monthly, quarterly, or annual increments or other increments that are appropriate for your project.

Control Costs

The Control Costs process monitors the project budget and manages changes to the cost baseline. Its primary focus is to prevent unauthorized or incorrect costs from being included in the cost baseline. This means you’ll also use Control Costs to assure that the project budget isn’t exceeded (resulting in cost overruns). If a change is implemented, you’ll have to make certain the budget for the changed item stays within acceptable limits.

Input Tools & Techniques Output
Project Management Plan Earned Value Management Project Management Plan update
Project Funding Requirement Forecasting Budget forecasts
Work Performance Info Performance Reviews Work Performance Measurement
Organizational Process Assets To-Complete Performance Index(TCPI) Organizational Process Assets update
Variance Analysis Change Requests
Project Management software Project  Document updates

Inputs of Control costs

The project management plan input includes the cost performance baseline and the cost management plan. You’ll use the cost performance baseline to compare actual expenditures to date on the project to the baseline. The cost management plan details how costs should be monitored and controlled throughout the life of the project.

Tools & Techniques of Control costs

This article will cover the following tools and techniques of the Control Costs

To-Complete Performance Index

TCPI is the projected performance level the remaining work of the project must achieve in order to meet the BAC or EAC. It’s calculated by dividing the work that’s remaining by the funds that are remaining.

The formula for TCPI when using the BAC is as follows:
(BAC – EV) / (BAC – AC)
When the BAC is no longer attainable, the project manager should calculate a new EAC.
The TCPI formula when EAC is the goal you’re aiming for is as follows:
(BAC – EV) / (EAC – AC)
Note one thing regarding this formula if cumulative CPI falls below one, all future project work must be performed at the TCPI

Performance Reviews
It compares cost performance over time and the estimates of funds required to complete the remaining work. Three types of analyses are associated with performance reviews: variance analysis, trend analysis, and earned value performance.
Variance analysis is calculated using EVM technique. Trend Analysis examines project performance and determines if the performance is improving or deteriorating.

Questions & Answers

  1. Three Team leaders of development submitted the individual cost estimates for their work packages as Rs 20K, Rs 50 K and Rs 35K.The testing team submitted their estimate as Rs 30K.You as the project manager had estimated the contingency reserve of Rs 15K.The management reserve allocated to your project was Rs 10K. Calculate the cost baseline of the project.
    • A. Rs 135 K
    • B. Rs 150 K
    • C. Rs 160 K
    • D. Rs 120 K

    Correct Answer: B
    Cost Baseline= Project cost + Contingency Reserve
    Project cost =Sum of control accounts
    =Control Account1(Dev team) + Control Account2(Testing Team)
    = Rs 105K + Rs 30 K= Rs 135K
    Cost Baseline = Rs 135K + Rs 15 K=Rs 150K

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About Mark Oswald

Mark is an experienced software engineer and technology blogger. He has over five years of experience in writing in different technological domains. Writing is his passion and he contributes regularly to the Whizlabs blog to share his knowledge.
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