Cost Management

Question 1

Def: Cost management involves:

Answer 1

estimating the final cost of the project using
“today’s” knowledge then adding a contingency amount (or a provision)
to allow for the risk of changes and/or new knowledge that will occur from
“today” until the final completion of the project.
The accuracy of the cost estimate (budget forecast) depends on the
quality of the information used “today” to forecast future changes or new
knowledge.
CVEN90045 Project Implementation

Question 2

What is an ideal project

Answer 2

The “ideal project” where the contingency allowed at each stage
can be reduced as the project proceeds

Question 3

What is an acceptable project

Answer 3

The “acceptable” project where final cost does
not exceed forecast cost including contingency

Question 4

What is an unnaceptabe project

Answer 4

The “unacceptable” project where final cost
exceeds first cost including contingency

Question 5

Goal of Cost Management

Answer 5

To provide advance notice of the direction a project cost is
trending so as to allow the “project owner” sufficient time
to either:
 Make changes to the project that will maintain the
original expectation of the project cost; or
 Maintain the project scope and change the project
budget to accommodate the notified cost trends.
CVEN90045 Project Implementation

Question 6

(3) Objectives of the Cost Management Process

Answer 6

1. To provide continual comparison of the original project
   budget with the forecast cost of the project at
   completion.
2. To provide an auditable (traceable) record of actual costs
   expended on the project.
3. To provide a continual update of the forecast rate of
   expenditure on the project. (cash‐flow forecast)
   CVEN90045 Project Implementation

Question 7

what is the difference between inherent and contingent risks?

Answer 7

Feature: Inherent Risk

Nature: Changes in measured
items (quantities, volumes, areas)

Certainty: Certain to occur, uncertainty lies in the magnitude of the change

Cost Impact: Typically results in cost increases

Examples: Changes in excavation quantities, variations in material requirements

Contingent Risk

Events or circumstances that may or may not occur

Uncertain to occur, possibility of happening but not guaranteed\

Can lead to cost increases (risks) or cost decreases (opportunities)

Labor strikes, weather events, design flaws, discovery of more efficient methods

Question 10

Types of Contract: (LLRTCC)

Answer 10

1. Lump Sum Contract
   ●
   Description: This contract involves a fixed price for the entire project scope. The contractor assumes the responsibility for completing the work within the agreed-upon lump sum amount
2. Lump Sum Plus Variations
   ●
   Description: Similar to a lump sum contract, but with provisions for agreed-upon variations to the scope. The contract includes a mechanism for pricing and incorporating changes requested by the owner or necessitated by unforeseen circumstances
3. Bill of Quantities and (next =>) Schedule of Rates
   ●
   Description: This type of contract involves breaking down the project scope into detailed items of work with corresponding quantities (Bill of Quantities) and unit rates (Schedule of Rates). The final cost is calculated by multiplying the actual quantities used by the agreed-upon rates
4. Target Cost
   ●
   Description: The owner and contractor agree on a target cost for the project. Incentives and penalties are often built into the contract to encourage the contractor to meet or beat the target cost
5. Cost Plus Fixed Fee
   ●
   Description: The owner reimburses the contractor for all allowable costs incurred plus a fixed fee for overhead and profit
6. Cost Plus Percentage Fee
   ●
   Description: Similar to cost plus fixed fee, but the contractor’s fee is calculated as a percentage of the total project cost

Question 11

Data Needed for the Cost Management Process

Answer 11

 The original project cost break‐down (approved Owner’s budget or
Contractor’s tender price).
 Any approved variations to the project cost at the date of review.
 Actual costs expended at a given date of review.(accrued costs basis)
 Physical progress achieved for the actual costs expended. (earned value)
 Forecast costs to complete the project scope from the date of review
taking account of earned value status and inherent risks.
 Forecast variations to the project cost based on an assessment of risks
and opportunities.
CVEN90045 Project Implementation

Question 12

How robust is (the accuracy of) the Control
Estimate? (FGPQ)

Answer 12

*The control estimate may be generated by:
Fixed commercial quotations;
 Qualified commercial quotations;
 Professional estimates;
 Guesstimates
*In all cases the cost is only as good as the level of project definition
(technical data) it is based on.
*Inevitably project definition increases as the project is developed and
implemented, so the Project Owner requires forecasts of the range of the
project cost as the project proceeds to implementation.
CVEN90045 Project Implementation

Question 13

Cost Report Requirements

Answer 13

• The Project Owner requires the project cost review to state:
   What is the forecast optimistic completion cost;
   What is the forecast conservative completion cost;
   What changes have occurred since the last forecast;
   What are the reasons for the changes since the last forecast;
• The report should be presented in a hierarchy of detail to
  allow the Project Owner to look at the summary first and to
  then examine changes in an increasing sequence of detail.
• For clarity & consistency, the changes can be grouped to a
  summary repor

Question 14

What is the
make‐up of a project’s cost? (Poci)

Answer 14

Direct Costs
:Everything needed to design & directly construct the permanent
works

Indirect Costs: Items such as: Fees, staff amenities, security, environmental
monitoring, I.T., H&S equipment, temporary electrical, general
scaffolding, general site cranage, cleaning of site buildings, traffic
management.

Overhead costs
:Site overheads plus corporate overheads for costs such as finance,
insurance, recruitment, training, QA system, legal, cost accounting,
OH&S system, public relations, marketing

Cost Provisions :Allowances for probable changes to costs (inherent risks) and for
unplanned or unexpected changes to costs. (contingent risks, also
referred to as “risk and opportunity” costs).

Profit: Return on investment related to working capital allocated for the
project and often expressed as a % of turn‐over.

Question 15

How are
the costs calculated?

Answer 15

Quantity‐related
Costs:
Labour, plant and materials for permanent works and
temporary works.

Time‐related Costs: Costs which change if the project duration changes.
Typical examples are: project management, site
operation(hire of site offices, security services)

Fixed Costs: Costs which are not affected by change in quantities nor
by the duration of the project.
Typical examples are: Insurance fees, approval fees,
corporate overheads (head office costs allocated to the
project)
CVEN90045 Project Implementation

Question 16

The provision for project contingency must take account of

Answer 16

Inherent risks of change in the base costs taking account of
the degree of project definition;
Contingent risks outside the base estimate known as risks and
opportunities for changes to the project;
Future escalation of prices included in the base estimate;
CVEN90045 Project Implementation

Question 17

The sources identify two primary approaches for managing contingency

Answer 17

●
Deterministic Approach: This method involves gathering estimates of cost variations from stakeholders involved in different project components and applying judgment to determine an overall contingency percentage.
●
Probabilistic Approach (Monte Carlo Simulation): This technique utilizes probability distributions and confidence levels to model the range of potential cost outcomes. Monte Carlo simulations run numerous iterations to determine the probability of exceeding various cost thresholds, providing the project owner with a range of potential cost outcomes and associated probabilities.