MODULE 6 Project Cost Management by HC1205210017

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									                                          MODULE 6
                                Project Cost Management


                     Module Content:
                             Hot Topics
                             Cost Risk
                             Inputs to estimating
                             Resource planning
                             Cost management plan
                             Cost estimating
                             Program reporting
                             Earned value
                             Accuracy of estimates
                             Accuracy standards
                             Project selection methods
                             Types of costs
                             Depreciation
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GU, PMP Preparatory Course, MODULE 6
              Cost Management
              (PMBOK® Chapter 7)




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GU, PMP Preparatory Course, MODULE 6
                                       Tips

       You should realize:
          Estimating should be based on a WBS to improve
           accuracy.
          Estimating should be done by the person doing
           the work.
          Historical information is a key to improving
           estimates.
          Costs (and time, scope and resources) should be
           managed to estimates.
          A cost (and time, scope and resource) baseline
           should be kept and not changed except for
           approved project changes.

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GU, PMP Preparatory Course, MODULE 6
                                        Tips
                                       (continued)


          Plans should be revised, as necessary, during
           completion of the work.
          Corrective action should be taken when cost
           problems (and time, scope and resource
           problems) occur.
          A project manager should never just accept
           time or cost requirements from management,
           but rather analyze the needs of the project,
           come up with his own estimate and reconcile
           any differences.

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GU, PMP Preparatory Course, MODULE 6
                                       COST RISK

         Sometimes a question on the exam will
          cross boundaries between risk,
          procurement and cost. Cost risk is best
          explained with an example question:

      "Who has the cost risk in a fixed price
       contract, the buyer or the seller?"

      The answer is the seller.
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GU, PMP Preparatory Course, MODULE 6
                                INPUTS TO ESTIMATING



       you need the following before you begin estimating:

          WBS

          Network diagram - Costs cannot be estimated until
           it is known how the project will flow from
           beginning to end.

          Schedule - For multi-year projects, the cost of a
           task is usually different if it is completed in one
           year compared to another.
           NOTE: This refers to an overall schedule, not a detailed one.
           The detailed schedule is created after estimating.
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GU, PMP Preparatory Course, MODULE 6
                                INPUTS TO ESTIMATING


         Historical information

         Resource pool - An understanding of the available
          resources or the resources assigned.

         Risk management plan - because it includes a
          budget for risk.

         Risks - An understanding of any risk uncovered to
          date. Remember, a full risk analysis of the details
          of the project will not have been completed before
          costs are estimated.

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GU, PMP Preparatory Course, MODULE 6
                              RESOURCE PLANNING
                                       (page 85)


                 The management of resources is as
                  important as managing cost, time, quality
                  and scope.
                  Resources must be planned and
                  coordinated in order to avoid common
                  problems such as lack of resources and
                  resources being taken away from the
                  project.
                 Resource planning may be a more
                  extensive activity than you do on your
                  projects.

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GU, PMP Preparatory Course, MODULE 6
                     What activities are involved in resource
                                    planning?


         Review WBS
         Identify potentially available resources
         Review historical information about the use of
          resources on past or similar projects
         Review organizational policies on resource use
         Solicit expert judgment on what resources are
          needed and available
         Quantify resource requirement by task
         Develop a plan as to what types of resources are
          needed, in what numbers, when

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GU, PMP Preparatory Course, MODULE 6
                          COST MANAGEMENT PLAN
                                       (page 89)


      Once costs are estimated, the project
       manager can and must put in place a plan for
       effectively managing the project to the cost
       baseline and manage cost variances.
      This plan is similar to other management
       plans (a PMIdD-ism).
      The cost management plan can be formal or
       informal,
      but is part of the project plan.
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GU, PMP Preparatory Course, MODULE 6
                                 COST ESTIMATING
                                       (page 86)


         ANALOGOUS ESTIMATING (Top-Down, page 88) - Top or
          middle managers use expert judgment or the actual
          time and cost of a previous, similar project as the basis
          for estimating the current project. Analogous estimating
          is a form of expert judgment.

         BOTTOM-UP ESTIMATING (page 88) - With this
          technique, the people doing the work create cost and
          schedule estimates. Estimates, based on the WBS, are
          rolled up to get a project total.

         PARAMETRIC ESTIMATING - Uses a mathematical
          model to predict project costs. For example, cost per
          line of code, cost per linear meter or cost per
          installation.
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GU, PMP Preparatory Course, MODULE 6
                            Advantages & Disadvantages
                  of Analogous Estimating and Bottom-Up Estimating




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GU, PMP Preparatory Course, MODULE 6
                             PROGRESS REPORTING
                                       (page 122)

          50/50 RULE –
           A task is considered 50% complete when it begins
           and gets credit for the last 50% only when it is
           completed.
          20/80 RULE –
           A task is considered 20% complete when it begins
           and gets credit for the last 80% only when it is
           completed.
          0/100 RULE –
            A task does not get credit for partial completion,
           only full completion
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GU, PMP Preparatory Course, MODULE 6
                            EARNED VALUE ANALYSIS
                                         (page 123


                           EVA is a method to measure scope, time
                            and project performance... Here is what
                            you need to know.




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GU, PMP Preparatory Course, MODULE 6
                                EARNED VALUE ANALYSIS
                           Formulas and Interpretations to Memorize




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GU, PMP Preparatory Course, MODULE 6
                                       TRICKS


       Make sure you understand and MEMORIZE the
         following:

       1.   Notice that EV comes first in every formula. Remembering
            this one fact alone should help you get about half the earned
            value questions right. (Aren't you glad you purchased this
            book?)

       2.   If it is a variance, the formula is EV minus something.

       3.   If it is an index, it is EV divided by something.

       4.   If the formula relates to cost, use AC.

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GU, PMP Preparatory Course, MODULE 6
                                       Tricks
                                       (Continued)




              5. If the formula relates to schedule, use PV.

              6. For interpretation: negative is bad and
                  positive is good. Thus a -200 cost
                  variance means that you are behind
                  (over) budget.

              7. For interpretation: greater than one is
                  good, less than one is bad.


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GU, PMP Preparatory Course, MODULE 6
                                        Tricks
                                       (Continued)




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GU, PMP Preparatory Course, MODULE 6
                               Old and New Acronym




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GU, PMP Preparatory Course, MODULE 6
                               Exercises     1


               CPI and SPI can be
                charted each month to
                show the project
                trends. Based on the
                following, what would
                you be more concerned
                about, cost or schedule,
                if you were taking over
                this project from
                another project
                manager?

                   Answer: The answer is
                    schedule. As of today,       20
                    SPI is closest to 1.
GU, PMP Preparatory Course, MODULE 6
                                       Exercises 2


        You have a project to build a
         new fence. The fence is four
         sided.
        Each side is to take one day
         to build and is budgeted for
         US $1,000 per side. . The
         sides are planned to be
         completed one after the
         other. Today is the end of day
         three. Using the project
         status chart, calculate EV,
         etc. When completed, check
         your answers on the answer
         sheet on the following page.
         Interpretation is also
         important on the exam. Can
         you interpret what each
         answer means?
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GU, PMP Preparatory Course, MODULE 6
                                Answer to Exercise 2




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GU, PMP Preparatory Course, MODULE 6
                              ACCURACY OF ESTIMATES



           The three levels of estimating accuracy you
                 must MEMORIZE for the exam are:

          1.   ORDER OF MAGNITUDE ESTIMATE - This type of
               estimate is usually made during the initiating phase
               and is in the range of-25% to +75% from actual.

          2.   BUDGET ESTIMATE - This type of estimate is usually
               made during the planning phase and is in the range of-
               10% to +25% from actual.

          3.   DEFINITIVE ESTIMATE - This type of estimate is also
               made during the planning phase and is in the range of-
               5% to +10% from actual.

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GU, PMP Preparatory Course, MODULE 6
                       ACCOUNTING STANDARDS
                                 I
            PRESENT VALUE: Present value means the
             value today of future cash flows and can be
             found by the formula:




                            NET PRESENT VALUE (NPV)
               This means the present value of the total benefits
                       (income or revenue) less the costs

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GU, PMP Preparatory Course, MODULE 6
                          ACCOUNTING STANDARDS
                                       II

                    INTERNAL RATE OF RETURN (IRR):
                     The rate (read it as interest rate) at
                     which the project inflows (revenues) and
                     project outflows (costs) are equal.


                    PAYBACK PERIOD:
                     The number of time periods it takes to
                     recover your investment in the project
                     before you start accumulating profit

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GU, PMP Preparatory Course, MODULE 6
                       ACCOUNTING STANDARDS
                                III

                    BENEFIT COST RATIO (BCR):
                     A BCR of>l means the benefits are
                     greater than the costs. A BCR of<l
                     means the costs are greater than the
                     benefits. A BCR == 1 means the costs
                     and benefits are the same.

                    OPPORTUNITY COST:
                     The opportunity given up by selecting
                     one project over another

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GU, PMP Preparatory Course, MODULE 6
                                       Exercise


              For each row on the following chart, enter the
              letter of the project you would select if the
              following information were provided.




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GU, PMP Preparatory Course, MODULE 6
                       ACCOUNTING STANDARDS
                                IV
         SUNK COSTS: Expended costs.

         LAW OF DIMINISHING RETURNS: The more you
          put into something, the less you get out of it. For
          example, adding twice as many resources to a task
          may not get the task done in half the time.

         WORKING CAPITAL: Current assets minus
          current liabilities, or the amount of money the
          company has to invest, including investment in
          projects.
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GU, PMP Preparatory Course, MODULE 6
                          PROJECT SELECTION METHODS



                 Present Value           Payback Period

                 Net Present             Benefit Cost
                  Value                    Ratio

                 Internal Rate of
                  Return




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GU, PMP Preparatory Course, MODULE 6
                                       TYPES OF COST



                 A cost can be either variable or fixed

                         VARIABLE COST - Any cost that
                          changes with the amount of
                          production or the amount of work.
                          Examples include the cost of material,
                          supplies and wages.

                         FIXED COST - Costs that do not
                          change as production changes.
                          Examples include set up, rental, etc.
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GU, PMP Preparatory Course, MODULE 6
                                       TYPES OF COST



                A cost can be either direct or indirect:

                        DIRECT COST - Costs that are directly
                         attributable to the work on the project.
                         Examples are team travel, team wages,
                         recognition and costs of material used on the
                         project.

                        INDIRECT COST - Overhead items or costs
                         incurred for the benefit of more than one
                         project. Examples include taxes, fringe benefits
                         and janitorial services.


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GU, PMP Preparatory Course, MODULE 6
                                       DEPRECIATION

       Large assets (e.g., equipment) lose value over time. Accounting
           standards call this depreciation. Several methods are used to
           account for depreciation
       There are two forms of depreciation:

       1.   STRAIGHT LINE DEPRECIATION - The same amount of
            depreciation is taken each year

       2.   ACCELERATED DEPRECIATION
           There are two forms of accelerated depreciation..
                 Double Declining Balance
                 Sum of the Years Digits
           Accelerated depreciation depreciates faster than straight
            line.

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GU, PMP Preparatory Course, MODULE 6
                                       New Concepts


         LIFE CYCLE COSTING:
            The project we are working on has a life after
             it is completed.
            Project manager and the company want the
             project costs to be as low as possible.
            However, if the project manager does not
             consider the life cycle costs, project costs
             may be low at the expense of greater overall
             costs for the rest of the life of the project.
            For example the operations and maintenance
             phase.
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GU, PMP Preparatory Course, MODULE 6
                                       New Concepts


            VALUE ANALYSIS: (Sometimes referred to as value
             engineering in the real world.)

                 Find a less costly way to do the same scope of work.
                 It requires the systematic use of techniques to identify
                  the required project functions, assign values to these
                  functions and provide functions at the lowest overall
                  cost without loss of performance.
                 If a team or someone else is looking at decreasing
                  project cost but maintaining the same scope of work,
                  they are performing value analysis.



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GU, PMP Preparatory Course, MODULE 6
                                Practice for the
                             CAPM® and PMP® Exams




                      Project Cost Management




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GU, PMP Preparatory Course, MODULE 6

								
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