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Estimating The Project Costs

The document discusses key concepts in project cost management including: - Defining costs as resources sacrificed to achieve objectives and usually measured monetarily. - Project cost management involves ensuring a project is completed within an approved budget. - It describes different types of costs such as direct, indirect, capital, operating costs and sunk costs. - Basic cost management principles include learning curve theory and using contingency and management reserves. - Cost management involves estimating, budgeting, and controlling costs through tools like earned value management, forecasting, and performance reviews to manage costs and variances.

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Ahmad Khan
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119 views17 pages

Estimating The Project Costs

The document discusses key concepts in project cost management including: - Defining costs as resources sacrificed to achieve objectives and usually measured monetarily. - Project cost management involves ensuring a project is completed within an approved budget. - It describes different types of costs such as direct, indirect, capital, operating costs and sunk costs. - Basic cost management principles include learning curve theory and using contingency and management reserves. - Cost management involves estimating, budgeting, and controlling costs through tools like earned value management, forecasting, and performance reviews to manage costs and variances.

Uploaded by

Ahmad Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Estimating the Project Costs

What is Cost and Project Cost Management?


•Cost are resources sacrificed to achieve a
specific objective, or something given up in
exchange.

•Costsare usually measured in monetary units,


such as dollars, pounds, rupees etc

•Project
cost management includes the
processes required to ensure that the project is
completed within an approved budget.
Basic Terminology of Cost
Management
 Tangible costs are those costs or benefits that an organization can easily
measure in dollars/rupees
 Intangible costs are costs or benefits that are difficult to measure in
monetary terms (Risks)
 Direct costs are costs that can be directly related to producing the products
and services of the project (Labor, Raw Material). Also called Variable
costs, because they vary with the rate the project work is performed. Direct
costs adds value to the project.
 Indirect costs are overhead costs of running of the business. They include
heating, lighting, rent, salaries of management etc. Indirect costs are also
fixed costs. Indirect costs add cost to the project without adding value.
 Capital costs are fixed, one-time expenses incurred on the purchase of land,
buildings, construction, and equipment used in the production of goods or in
the rendering of services. In other words, it is the total cost needed to bring a
project to a commercially operable status.
  Operating costs or recurrent costs are also recorded on a year-by-year basis.
They are often divided into fixed costs ( overheads) and variable costs.
 A sunk cost is a cost that an entity has incurred, and which it can no longer
recover. For example, once rent is paid, that dollar amount is no longer
recoverable - it is 'sunk.'
Profits are revenues minus expenses.
The cash flow statement identifies the cash that is flowing in and out of the
company. The purpose of the cash flow statement is to show where an
entities cash is being generated (cash inflows), and where its cash is being
spent (cash outflows), over a specific period of time (usually quarterly and
annually).
Basic Principles of Cost Management (cont.)
 Learning curve theory states that when many items are
produced repetitively, the unit cost of those items decreases in
a regular pattern as more units are produced
 Reserves are dollars/rupees included in a cost estimate to
reduce cost risk by allowing for future situations that are
difficult to predict
◦ Contingency reserves allow for future situations that may be
partially planned for and are included in the project cost
baseline (sometimes called known unknowns)
◦ Management reserves allow for future situations that are
unpredictable (sometimes called unknown unknowns)

5
Cost Management - Phases
Project Cost Management
Cost Management Key Terms
 PV - Planned Value, estimated value of the planned
work
 EV – Earned Value, estimated value of work done

 AC – Actual Cost, what you paid

 ETC – Estimate to Complete, forecasted costs to


complete job
 VAC – Variance at Completion, how much over/under
budget do we expect to be?
Why Do We Manage Cost?
 Part of triple constraint, can’t manage one
without the others (scope, time, and quality)

 Plots of cost and scope against plan can help


spot problems early
Cost Estimating

 The process of developing an approximation of the


monetary resources needed to complete project
activities
 Project managers must take cost estimates seriously
if they want to complete projects within budget
constraints.
 It’s important to know the types of cost estimates,
how to prepare cost estimates, and typical problems
associated with cost estimates.
Cost Estimation Tools and Techniques

◦ Expert Judgement guided by historical information/ and prior similar


projects. And whether to combine methods of estimating and how to
reconcile the differences
◦ Analogous or top-down estimates: Use the actual cost of a previous,
similar project as the basis for estimating the cost of the current
project.
◦ Resource cost. The cost per use is the cost for the use of
a resource that can be considered as a one-time cost incurred every
time the resource is used by the activity.
◦ Bottom-up estimates: Involve estimating individual work items or
activities and summing them to get a project total.
Parametric modeling: Uses project characteristics (parameters) in a
mathematical model to estimate project costs.
 Regression analysis – based on analysis of multiple data points
 Learning Curve – The first unit costs more than the 100th, forecasts
efficiency gains
◦ Computerized tools: Tools, such as spreadsheets and project
management software, that can make working with different cost
estimates and cost estimation tools easier.
11
Estimating Methods
◦ Three point estimating- Program evaluation estimate and review technique
(PERT) – it uses three estimates to define an approximation range of an
activities cost.
◦ a) Most likely b) optimistic c) pessimistic
◦ Vendor Bid Analysis is a technique used to figure out the cost of a project by
comparing the bids submitted by many suppliers. (via quotes, bids, proposals,
etc.)]
◦ Reserve Analysis – a project is analyzed from a cost overruns point of view and
buffers are placed in appropriate place. These buffers are called Contingency and
Management Reserves Cost of quality (COQ) is defined as a methodology that
allows an organization to determine the extent to which its resources are
used for activities that prevent poor quality, that appraise the quality of the
organization's products or services, and that result from internal and external
failures.
◦ Contingency reserve: Allowances for unplanned changes from risk
◦ Management reserve: Budget reserved for unplanned changes(cost and scope)
Cost Budgeting
 Cost budgeting involves allocating the project cost estimate to
individual work items over time.

 Remember Contingency items are for unplanned but required


changes it is not to cover things such as:
◦ Price escalation
◦ Scope & Quality Changes

 The WBS is a required input for the cost budgeting process


because it defines the work items.
 Important goal is to produce a cost baseline:
◦ A time-phased budget that project managers use to measure and monitor
cost performance.

13
Cost Budgeting- Tools
 Cost aggregation is defined as summing the cost for the individual work package
to control the financial account up to the project level. Or cost estimates
aggregated according to the work break down structure

 Reserve Analysis is one of the techniques used to determine a project budget.


During Reserve Analysis, a project is analyzed from a cost overruns point of view
and buffers are placed in appropriate place. These buffers are called
Contingency and Management Reserves.
 This budget is there to provide to the response or impact of some or all of the
project risks should they occur and form part of the determining budget process.

 Parametric estimating, a more accurate technique for estimating cost and


duration, uses the relationship between variables to calculate the cost or
duration. Essentially, a parametric estimate is determined by identifying the unit
cost or duration and the number of units required for the project or activity.
 It is based on historical data

 Funding Limit Reconciliation. The process of comparing the planned expenditure


of project funds against any limits on the commitment of funds for the project to
identify any variances between the funding limits and the planned expenditures.

Cost Control- tools
Cost control is the practice of identifying and reducing business expenses to increase profits, and it
starts with the budgeting process. A business owner compares actual results with the budgeted
expectations, and if actual costs are higher than planned, management takes action.

 Tools:
 Earned value management, compares the amount of work that was planned with what was actually
accomplished
 Forecasting: as the project develops the experts may develop a forecast for the estimate at
completion (EAC), it may differ from the budget at completion (BAC), based on project performance.
 To complete performance index: calculated projection of cost performance
 TCPI (under budget): TCPI=(BAC-EV)/(BAC-AC)
 TCPI ( over budget): TCPI=(BAC-EV)/(EAC-AC)
 A TCPI<1 is considered good because it indicates efficiency that is to complete in less than planned
 BAC – Budget at Completion, the budget for the total job
 EAC –Estimate at Completion, what is the total job expected to cost?
 EV – Earned Value, estimated value of work done
 AC – Actual Cost, what you paid

 Performance Reviews: Comparing cost performance over time, and the estimated funds required to
complete the remaining task. This includes the following:
 A) Trend Analysis b) Variance Analysis c) Earned value performance
Cost Management Plan
 A cost management plan is a document that
describes how the organization will manage
cost variances on the project.

16
Cost Management Plan

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