MECH 3170 Ch. 7 - Cost Management Flashcards
What does Project Cost Management include?
Includes the processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget.
What does 7.1 Plan Cost Management (P) result in??
Results in a Cost Management Plan that provides processes for how the project budget will be managed throughout the project
What should the Cost Management Plan include?
Units of measure, levels of precision, levels of accuracy, control thresholds, earned value management rules, reporting formats
What is 7.2 Estimate Costs (P)?
It is the process of developing an approximation of the monetary resources needed to complete project activities.
What should cost estimates include?
An analysis of all potential costing options and alternatives that could be utilized to complete the project in the most cost effective manner possible.
What are possible costing options to consider?
Make vs buy;
Buy vs lease;
Sharing of resources, etc
Estimate Accuracy
Cost estimates for a project should be provided in a range
What are the stages of Estimate Accuracy and estimates?
Rough Order of Magnitude;
Budget Estimate;
Definitive Estimate
What is the rough order of Magnitude, when is it used, and what estimate accuracy does it have?
Rough Order of Magnitude is usually made during project initiating when little is known about the project. It typically has a range of +/- 50% from actual. This can vary depending on how much is known about the project.
What is Budget Estimate, when is it used, and what estimate accuracy does it have?
Usually made during project planning. Typical range is +/-10% to 25% from actual
What is Definitive Estimate, when is it used, and what estimate accuracy does it have?
As the project progresses, the estimate will become more refined. Typical ranges is +/-10% from actual
What costs need to be included in your project estimate?
All costs involved in all the efforts needed to complete the project.
What are the 4 main ways to categorize and look at costs?
Variable, fixed, direct, and indirect costs
What are Variable Costs?
Costs that change with the amount of production or the amount of work. Example, cost of material, supplies, wages, etc
What are Fixed Costs?
Costs that don’t change as production changes. Example, cost of set-up, rent, etc
What are Direct Costs?
Costs that are directly attributable to the work on the project. Example, team travel, team wages, costs of material used on the project, etc
What are Indirect Costs?
Overhead items or costs incurred for the benefit of more than one project. Example, taxes, janitorial services, HR, etc
What is Life Cycle Costing?
Involves looking at the cost of the whole life of the product (or service) produced by the project, not just the cost of the project.
Why is it important to consider the life cycle cost?
Neglecting the long term maintenance and operating costs might have detrimental effects on these downstream costs.
Sustainment costs are often much higher than the initial procurement/project costs. Important for stakeholders to understand the overall costs of the product/service
How is estimating done?
Using the same techniques as for estimating activity durations, as well as bottom-up estimating.
One-point, analogous, parametric, Three-point, and bottom-up estimating
What is bottom-up estimating?
Involves creating a detailed estimate for each work activity or package, rolling these up into control accounts, and finally into an overall project estimate. Requires an accurate WBS
What are the Advantages and Disadvantages of Bottom-Up Estimating?
Advantages: Provides more accurate estimates, gets team buy-in.
Disadvantages: Takes time to develop, requires a well defined project
What is 7.3 Determine Budget (P)?
Process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.
What is Cost Aggregation?
The process of rolling up the project costs to create a budget. Activity costs re rolled up to work package costs, which are rolled up to control account costs rolled up to project costs.
What are Contingency Reserves?
Amount added to the total project cost estimate to allow for potential cost impacts from the risks that remain after risk response planning
What is the Cost Baseline?
The sum of all activity estimates and the contingency reserves. Cost baseline represents the funds the project manager has the authority to manage and control.
What are Management Reserves?
Additional funds set aside to cover unforeseen risks or changes to the projects
What is the cost budget?
The cost baseline plus the Management Reserves. Represents how much money the company should have available for the project. Use of Management Reserves is generally under the control of the project sponsor or senior management.
What re your options of project costs are too high?
No real cost compression techniques such as those that can be used in scheduling. Options are to subcontract work that can be done by a third party for less, use less skilled resources, or reduce/change scope.
What are some budgeting tips?
Involve stakeholders early in budgeting.planning processes.
Be sure to consider time-phased expenditure of funds. Make sure the rate at which project will spend funds is in line with how you will get paid by the customer.
What is 7.4 Control Costs (M&C)?
Process of monitoring the status of the project to update the project costs and manage changes to the cost baseline.
What does 7.4 controlling project costs includes?
Influencing the factors that create changes to costs;
Managing changes to the budget;
Ensuring that cost expenditures do not exceed the authorized funding;
Monitoring cost performance to isolate and understand variances from approved cost baseline;
Monitoring work performance against funds expended;
Bringing expected cost overruns within acceptable limits
What is Earned Value Management (EVM)?
A technique for measuring project performance and progress in an objective manner that integrates scope, schedule, and cost.
What are the 3 key measurements that EVM develops and monitors?
Planned Value (PV), Earned Value (EV), and Actual Cost(AC)
What is Planned Value (PV)?
The authorized budget assigned to the work to be accomplished for an activity or WBS component. Essentially, what the work is planned to cost.
What is the Budget At Completion?
It is the total Planned Value for the project. Also known as the cost baseline.
What is Actual Cost (AC)?
The total cost actually incurred for undertaking an activity or WBS component. The AC will have no upper limit.
What is Earned Value (EV)?
The estimated value of the work that has actually been accomplished. The EV must be related to the PV baseline and cannot be greater than the authorized PV budget for a component.
It is monitored from an incremental perspective to determine current status and cumulatively to determine long-term performance trends.
What is the Schedule Performance Index (SPI)?
A measure of progress achieved compared to progress planned. Measures schedule efficiency
What does an SPI value greater than 1 and lower than 1 indicate?
SPI<1.0 - Less work was done than planned
SPI>1.0 - More work was completed than planned
What is the Cost Performance Index (CPI)?
A measure of the value of work completed compared to the actual cost or progress made on the project.
What does an CPI value greater than 1 and lower than 1 indicate?
CPI<1.0 - Indicates a cost overrun for work completed
CPI>1.0 - Indicates a cost underrun for work completed
EVM - Forecasting
In addition to reporting performance to date, EVM tools can be used to determine forecasts for your projects
What is Estimate at Completion (EAC)?
The expected total cost of completing all work.
The sum of the AC to date and an estimate to complete the rest of the work
What are the 4 common ways to calculate EAC (Estimate at Completion)?
Same Rate,
Planned Rate,
Fundamentally Flawed,
Cost and Schedule Concerns.
What is the purpose of the EAC?
Is to create a forecast based on the past and expected future performance of the project.
What is the usage for the Same Rate EAC method?
If the CPI s expected to be the same for the remainder of the project.
What is the usage for the Planned Rate EAC method?
If future work will be accomplished at the original planned rate (Rate of work to date is atypical to future work)
What is the usage for Fundamentally Flawed EAC method?
If the initial plan is no longer valid (or was fundamentally flawed), a new estimate of remaining work is required
What is the usage of the Cost and Schedule Concerns EAC method?
If both the CPI and SPI influence the remaining work (current variances are thought to be typical of the future - assumes poor cost performance and a need to hit a firm completion date)
Estimate to Complete (ETC)
The expected cost to finish all the remaining project work. May require a full re-estimate of remaining work (from bottom-up_
Variance at Completion (VAC)
How far your project is off of your original budget.
A projection of the amount over or under budget the project will be
To Complete Performance Index (TCPI)
Divides the work remaining to be done by the money remaining to do it. Answers the question “In order to stay within budget, what rate must we meet for the remaining work?”
What does cost management involve?
Planning cost management;
Estimating costs;
Determining budget;
Controlling budget
