Chapter 7 - Cost Management Flashcards
Life cycle costing
Looking at the cost of the whole life of the product, not just the cost of the project
Value analysis
Finding ways to provide required features at the lowest overall cost without loss of performance
Plan Cost Management process
Identifying how you’re going to plan, manage, and monitor and controll project costs
Why are NPV, ROI, payback period, and IRR used in cost management?
Used to evaluate whether the project is still feasible within the charter and whether the measurable project objectives can be achieved
Discounted cash flow
- Used in project selection to estimate the attractiveness of an investment by predicting how much money will be received in the future, and then discounting it to its current value
- Used to evaluate the potential revenue to be earned from specific project work
What is the output of the Plan Cost Management process?
Cost management plan, i.e., budget management plan or budget plan
What costs should you estimate?
- Quality efforts
- Risk efforts
- PM’s time
- Project management activities
- Expenses for physical office spaces
- Overhead costs (management salaries, general office expenses, etc.)
What are the 4 types of costs?
- Variable
- Fixed
- Direct
- Indirect
Variable costs
Costs that DO change with the amount of production or work
Fixed costs
Costs that DO NOT change as production changes
Direct costs
Costs that are directily attributable to the work on the project
Indirect costs
Overhead items or costs incurred for the benefit of more than one project
Why is having a project schedule needed before you can come up with a budget?
- The timing of when you buy something may affect its cost
- You need to develop a time phased spending plan to monitor and control project expenditures so you know how much money will be spent during specific periods of time
When to use top down (analogous) estimating?
- Strapped for time and money
- When you have proper experience
- Predictable projects
When to use bottom up estimating?
- Not srapped for time and money
- When you have detailed project activities
- When you have proper info needed to manage and monitor and control costs
Types of estimate ranges
- Rough Order of Magnitude (ROM)
- Budget
- Definitive estimate
Rough Order of Magniture (ROM) estimate
- Usually made during project initiating
- -25% to +75%
Budget estimate
- A more defined ROM estimate
- -10% to +25%
Definitive budget
- More refined budget estimate
- +/- 10%
- or
- -5% to 10%
What are the ouputs of the Estimate Costs process?
- Cost estimates
- Basis of estimates (how you got the estimates)
Steps to determine budget
- Activity estimates
- Work package estimates
- Control account estimates
- Project estimates
- Contingency reserves
- Cost baseline
- Management reserves
- Cost budget
- Compare figures to parametric estimates or to expert judgment
- Check cash flow
- Perform last reconciliation
What does the Determine Budget process result in?
The scope baseline, including all funding requirements
What can you do if a risk is no longer determined to be a threat?
Remove the associated contingency reserve from the cost baseline
What does Earned Value Analysis utilize to measure project performance against?
- Scope baseline
- Schedule baseline
- Cost basline
- Better known as the performance measurement baseline
Planned Value (PV)
As of today, what is the estimated value of the work planend to be done?
Earned Value (EV)
As of today, what is the estimated value of the work actually accomplished?
Actual cost (AC)
As of today, what is the actual cost incurred for the work accomplished?
Budget at Completion (BAC)
How much did we budget for the total project effort?
Estimate at Completion (EAC)
What do we currently expect the total project to cost?
Estimate to Complete (ETC)
- From this point on, how much more do we expect it to cost to finish the project?
- ETC = EAC - AC
- or
- Reestimate
Variance at Completion (VAC)
- As of today, how much over or under budget do we expect to be at the end of the project?
- VAC = BAC - EAC
Cost Variance (CV)
- CV = EV - AC
- Negative = OVER budget
- Positive = UNDER budget
Schedule Variance (SV)
- SV = EV - PV
- Negative = BEHIND schedule
- Positive = AHEAD of schedule
Cost Performance Index (CPI)
- CPI = EV / AC
- “We’re getting $___ worth of work out of every dollar we spend”
- > 1 = GOOD
- < 1 = BAD
Schedule Performance Index (SPI)
- SPI = EV / PV
- “We’re progressing at ___% of the originally planned rate”
- > 1 = GOOD
- < 1 = BAD
EAC to use when the original estimate was fundamentally flawed?
EAC = AC + Bottom up ETC
EAC to use when no variances from the BAC have occurred, or if you will continue at the same rate of spending?
EAC = BAC / CPI
EAC to use when current variances are thought to be atypical of the future?
EAC = AC + (BAC - EV)
EAC to use when current variances are thought to be typical of the future and when project schedule constraints will influence the completion of the remaining effort?
EAC = AC + ( (BAC - EV) / (CPI x SPI) )
To Complete Performance Index (TCPI)
- To stay within the budget, what rate we do need to meet for the reamining work?
- TCPI = (BAC - EV) / (BAC - AC)
- > 1 = BAD
- < 1 = GOOD
Tips regarding CV, SV, CPI, and SPI
- EV comes FIRST!
- If the formula relates to cost, use AC
- If the formula relates to schedule, use PV
-
Negative is bad and positive is good (also applies to VAC)
- ^ Opposite is true for TCPI
