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INSE 6230: Total Quali ty Project Managemen t
Lectu re #8
Project Cost Management
Nov. 12, 2012
Instruc tor: Dr. Zhigang (Wil l) Tian
CIISE, Faculty of Engin eering and Comput er Science
Conco rdia Univers i ty
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Project Cost Management
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What is Cost and Project Cost Management?
Cost is a resource sacrificed or foregone toachieve a specific objective or something given upin exchange
Costs are usually measured in monetary units like
dollars
Project cost management includes theprocesses required to ensure that the project is
completed within an approved budget
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Project Cos t Management Processes
Estimating costs: developing an approximationor estimate of the costs of the resources neededto complete a project
Determining the budget: allocating the overallcost estimate to individual work items to establisha baseline for measuring performance
Controlling costs: controlling changes to the
project budget
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Project Cost Management Summary
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Project Cost Estimation
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Engineer ing Costs
Fundamental cost concepts:
Fixed and variable costs
Marginal and average costs Sunk and opportunity costs
Recurring and non-recurring costs
Incremental costs, cash costs and bookcosts
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Fixed and var iable costs
Fixed costs are constant regardless oflevel of output or activity
E.g. factory floor space and equipment
Variable costs depend on level of outputor activity
E.g. labor costs (depend on number ofemployees),
E.g. production costs (depend on number ofitems produced)
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Marginal and average costs
Marginal cost is the cost of one more unit e.g. renting a hotel room and having to pay
extra if the number of people exceeds say 2
e.g. Sport shoes
Average costs= Total cost / Number of units
- e.g. Sport shoes
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Example 1
Cost components:
Bus rental
Event ticket
Gas and other fuels
Refreshments
Bus driver
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Example 1
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Break-even Poin t
Break-even point:- The level of business activity where total costs equaltotal revenue.
Profit region
Loss region
Example 2
- Charter ticket price: $35 per
- Total cost as a function of the number of people on the trip
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Break-even chart : Example
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Cost Est imat ion Too ls and Techniques
Basic tools and techniques for cost estimates
Analogous ortop-down estimates:use the actualcost of a previous, similar project as the basis forestimating the cost of the current project
Bottom-up estimates: involve estimating individualwork items or activities and summing them to get aproject total
Parametric modeling:uses project characteristics
(parameters) in a mathematical model to estimateproject costs
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Analogous or top-down estimates
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Analogous Methods : Cos t indexes
Cost indexes Dimensionless numbers reflecting the
change in price over time (commodity
price indexes, e.g. labor costs, compositeindexes, e.g. Manufacturers Price Index)
Cost at time A = Index value at time ACost at time B Index value at time B
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Example 3
Miriam is interested in estimating the annual labor and
material costs for a new production facility. She obtained thefollowing data:
Labor costs:
Labor cost index value was 124 ten years ago and is 188
today Annual labor costs for a similar facility were $575,500 ten
years ago
Material costs:
Material cost index value was at 544 three years ago and is715 today
Annual material costs for a similar facility were $2,455,000three years ago
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Example 3: so lut ion
Labor costs:
Annual cost today = Index value today
Annual cost 10 yrs ago Index value 10 yrs ago
Annual cost today = (188/124)*$575,500 = $871,800
Material costs:
Annual cost today = Index value today
Annual cost 3 yrs ago Index value 3 yrs ago
Annual cost today = (715/544)*$2,455,000 = $3,227,000
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Power-sizing model
Used to estimate costs of industrial plants andequipment.
Uses exponentx, thepower-sizing exponent, torepresent economies of scale in size or capacities
Ifx=1, linear relationship;
ifx>1, diseconomies of scale;
ifx
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Power-Sizing Model (cont)
x
BequipmentofcapacitySize
AequipmentofcapacitySize
BequipmentofCost
AequipmentofCost
)(
)(
Size (capacity) of A and B must be in the same
physical units Costs for both A and B must occur at the samepoint in time
If costs of A and B do not occur at the same time,
cost indexes can be used to convert costs to thesame time
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Examp le: Power-Sizing Exponent Values
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Example 4: Combined Cost Est imat ing
In the screening estimate of a new facility, a single parameter is often usedto describe a cost function. For example, the cost of a power plant is a
function of electricity generating capacity expressed in megawatts, or thecost of a sewage treatment plant as a function of waste flow expressed inmillion gallons per day.
The general conditions for the application of the single parameter costfunction for screening estimates are:
1. Exclude special local conditions in historical data2. Determine new facility cost on basis of specified size or capacity3. Adjust for inflation index4. Adjust for local index of construction costs5. Adjust for different regulatory constraints6. Adjust for local factors for the new facility
Some of these adjustments may be done using compiled indices, whereasothers may require field investigation and considerable professionaljudgment to reflect differences between a given project and standardprojects performed in the past.
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Screen ing est imate for a ref inery
The total construction cost of a refinery with a production
capacity of 200,000 bbl/day in Gary, Indiana, completed in1999 was $100 million. It is proposed that a similar refinerywith a production capacity of 300,000 bbl/day be built inLos Angeles, California, for completion in 2003. For theadditional information given below, make an estimate ofthe cost of the proposed plant.
(bbl/day = barrels/day)
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Screen ing est imate for a ref inery
1. In the total construction cost for the Gary, Indiana, plant,there was an item of $5 million for site preparation which
is not typical for other plants.2. The variation of sizes of the refineries can be
approximated by the exponential rule, power x = 0.6.3. The inflation rate is expected to be 8% per year from
1999 to 2003.
4. The location index was 0.92 for Gary, Indiana and 1.14for Los Angeles in 1999. These indices are deemed tobe appropriate for adjusting the costs between these twocities.
5. New air pollution equipment for the LA plant costs $7
million in 2003 dollars (not required in the Gary plant).6. The contingency cost due to inclement weather delay will
be reduced by the amount of 1% of total constructioncost because of the favorable climate in LA (compared toGary).
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Solut ion: Screening est imate for a ref inery
On the basis of the above conditions, the estimate for thenew project may be obtained as follows:
1. Typical cost excluding special item at Gary, IN is
$100 million - $5 million = $ 95 million
2. Adjustment for capacity based on the exponential law yields
($95)(300,000/200,000)0.6 = (95)(1.5)0.6 = $121.2 million
3. Adjustment for inflation leads to the cost in 2003 dollars as
($121.2)(1.08)4 = $164.6 million
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Solut ion: Screening est imate for a ref inery
4. Adjustment for location index gives
($164.6)(1.14/0.92) = $204.6 million
5. Adjustment for new pollution equipment at the LA plant gives
$204.6 + $7 = $211.6 million
6. Reduction in contingency cost yields
($211.6)(1-0.01) = $209.5 million
Since there is no adjustment for the cost of constructionfinancing, the estimate for the new project is $209.5 million.
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Bottom-up estimates
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Example 5: Cost Est imating
Surveyor Pro Project
(Source: K. Schwalbe, Information Technology Project Management, Thomson, 2007)
Goal of the project:
- produce 100 handheld devices, continue developing the
software (user interface), test the new system in the field,
and train 100 surveyors on how to use the new system.
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Example:
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Example:
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Example: Cos t Est imat ing
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Determining the Budget
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Determ ining the Budget
Cost budgeting involves allocating the project cost
estimate to individual work items over time
The WBS is a required input to the cost budgeting process
since it defines the work items. Activity cost estimates
and project schedule are also needed.
An 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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Example: Surveyor Pro Project Cost Basel ine
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Project Cost Control
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Project cos t con tro l
Project cost control includes: Monitoring cost performance:
comparing Actual and Budgeted
Determine the appropriate project changes to beincluded in a revised cost baseline
Informing project stakeholders of authorized changesto the project that will affect costs
Many organizations around the globehave problems with cost control
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Earned Value Management (EVM)
EVM is a project performance measurement
technique that integrates scope, time, and costdata
Given a baseline (original plan plus approved
changes), you can determine how well the projectis meeting its goals
You must enter actual information periodically touse EVM
More and more organizations around the worldare using EVM to help control project costs
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Earned Value Management (EVM) terms
The planned value (PV), formerly called the budgeted cost
of work scheduled (BCWS),also called the budget, is thatportion of the approved total cost estimate planned to bespent on an activity during a given period
Actual cost (AC), formerly called actual cost of work
performed (ACWP), is the total costs incurred inaccomplishing work on an activity during a given period
The earned value (EV), formerly called the budgeted costof 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 workon the project or activity to date: EV = PV to date * RP
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Earned Value Management (EVM) terms
Rate of performance (RP) is the ratio of actual work
completed to the percentage of work planned to havebeen completed at any given time during the life of theproject or activity
Example:Suppose the server installation was halfway completed bythe end of week 1; the rate of performance would be 50%because by the end of week 1, the planned schedule
reflects that the task should be 100% complete and only50% of that work has been completed
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Rate of performance (RP) est imat ion
Units completed
Incremental milestones
Start/finish
Supervisor opinion
Cost ratio
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Example 6: EVM terms
Suppose according to the plan, it would take 1 week and
$10,000 to complete the web server project. Suppose it actually took 2 weeks and $20,000 to complete
the project: $15,000 in the first week, and $5,000 in thesecond week.
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Example 7: PV, EV calcu lat ions
Total cost: A: 18, B: 10, C: 20, D: 40.
PLANNED VALUE (Budgeted cost of the work scheduled), BCWS= 18 + 10 + 16 + 6 = $50
EARNED VALUE (Budgeted cost of the work performed), BCWP= 18 + 8 + 14 + 0 = $40
ACTUAL COST (of the work performed), ACWP= $45 (Data from Acct. System)
(Source: http://www.hyperthot.com/pm_cscs.htm
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Earned Value Management (EVM) terms
Cost Variance (CV): If CV
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Earned Value Management (EVM) terms
Cost Performance Index (CPI): If CPI
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Earned Value Management (EVM) terms
Budget at completion (BAC): the original total budget for the project.
Estimate at completion (EAC): an estimate of the cost to complete
the project based on performance to date. Estimate time to complete: an estimate of the time to complete the
project based on performance to date
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Example 8: EVM terms
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Examp le 9: Earned value chart for a pro ject
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Another case for est imat ing Est imate at completion (EAC)
Case 1: The project continues under the same conditionexperienced to date:
EAC = BAC/CPI
Case 2: The project continues under the condition as
originally planned:
EAC= BAC + (AC- EV) at present
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Example 10: EAC calculat ion
A project has an original total budget of $1,000,000. At month
10, the ACWP (or AC) is $800,000. Suppose CPI=1.2, and
SPI=0.9. Calculate the EAC under the two situations:
(1). The project continues under the same condition
experienced to date.
(2). The project continues under the condition as originally
planned.
