Transcription
Foreign. [Music] T cost management. Project cost management 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.
The below figure gives an overview of project cost management processes. Estimate costs is the process of developing an approximation of the monetary resources needed to complete project activities. Determined budget is the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. And control costs is the process of monitoring the status of the project to update the project costs and managing changes to the cost baseline.
Types of costs in projects. There are four types of costs in projects: direct costs, indirect costs, variable costs, and fixed costs.
Direct costs. Direct costs are the expenses that are built directly to the project. They can be traced back to a product and can be measured, and they are specifically identified by their objectives. Examples of direct costs are direct materials, direct labor, use of equipment, use of facilities, number of employees, and consumption of services.
Indirect costs. Indirect costs are not directly identifiable. They are not directly related to the project product and they belong to the core supporting business but cannot be directly assigned to projects or individual contracts. Examples of indirect costs are fringe benefits, indirect manufacturing expenses, general indirect expenses, and general and administrative expenses.
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Variable costs. Variable costs vary as changes in the production are implemented. In other words, there is no variable cost when there is no production. Examples of variable cost are running expenses of equipment and materials, performance bonuses, freight, and sales commissions.
Fixed costs. Fixed costs remain constant and they are independent of the amounts of work performed. In other words, fixed costs remain the same even when the production line is null. Example of fixed costs are rent, depreciation, administrative team salaries, and general expenses.
Understanding the first process, estimate costs. It is the process of developing an approximation estimate, and it is used to calculate the cost of resources, materials, and human which are necessary to complete the project activities. Estimate costs also includes weighing alternative options and examining risks and trade-offs, for example, build versus buy or buy versus lease. Key benefit: it determines the amount of cost required to complete project work. The inputs, tools and techniques, and outputs of the cost estimate process are depicted in the following figure.
Understanding the second process, determine budget. It is the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. Key benefits of this process is that it determines the cost baseline against which project performance can be monitored and controlled. The inputs, tools and techniques, and outputs of the determined budget process are depicted in the following figure.
Now let us understand control costs. These processes monitor the status of a project in order to update the project costs. It allows project managers to manage the changes in the cost baseline if present. It is important to note that in any project life cycle, there will be changes in the cost. Key benefit: it provides the means to recognize variants from the plan, particularly on the cost, so that they can take the appropriate corrective action to reduce the risk. The inputs, tools and techniques, and outputs of the control costs process are depicted in the following figure.
Tools and techniques for control costs. Tools and techniques for control costs are earned value management or EVM, forecasting, to complete performance index or TCPI, and performance reviews.
Earned value management. This technique helps the project management team to assess and measure the project performance and progress. It compares the amount of work that was planned with what was actually accomplished to determine if cost and schedule performance is as planned. Earned value management develops and monitors three key dimensions for each work package and control account: earned value, planned value, and actual cost. Planned value represents the estimate value of the work planned to be done. Earned value represents the estimated value of the work actually accomplished and the planned cost to complete the work that has been done. And actual cost or total cost is the cost incurred for the accomplishments of the work.
Cost variance and schedule variance. Variances from the approved baseline are also monitored through cost and schedule variances.
Cost variance. It is the amount of budget deficit or surplus at a given point in time, and it is expressed as the difference between earned value and actual cost. If the cost is higher than the budgeted amount, the resulting number is negative, and if the cost is lower than the budgeted amounts, the resulting number is positive.
Schedule variance. It is a measure of schedule performance and it's expressed as the difference between the earned value and the planned value at the given point in time. If the project is ahead of the planned delivery date, the resulting amount is a positive number, and if the project is behind the plan delivery date, the resulting amount is a negative number. The three parameters of planned value, earned value, and actual cost can be monitored and reported on both period by period basis, which is typically weekly or monthly, and on a cumulative basis. In the below figure, S curves are used to display earned value data for a project that is performing over budget and behind the schedule, and it also shows cost variance and schedule variance at any given point in time.
Case study: Finding cost and schedule variants. Let us consider an example to find the cost variance and schedule variants of a given project. Suppose that for a project, the planned value is $400, the earned value is $375, and the actual cost is $325. Finding the cost variance using the formula of cost variance, we may calculate that the cost variance is $50. Since the value of cost variance is positive, it means that we are spending less than the planned amount.
Finding the schedule variance. After using the formula of schedule variance, we may calculate that schedule variance is -$25. Since the value of schedule variance is negative, it means that our project is behind schedule.
Case study. Suppose that you're required to complete a project in 12 months and the total cost to the project is $100,000.
Finding the planned value. In our case, 50% of the work should be completed on completion of six months. So, the planned value of the project will be calculated as: Planned Value = 50% * $100,000, or the Planned Value = $50,000.
Finding the earned value. On completion of six months, you find out that you've spent $60,000 but were able to complete only 40% of the project work. So, the earned value of the project will be calculated as: Earned Value = 40% * $100,000, or Earned Value = $40,000.
Finding the actual cost. According to the definition of actual costs, it is the amount of money that has been spent so far. In our case, since we've spent $60,000, the actual cost is $60,000.
Finding the cost variance and schedule variance. If we use the cost variance formula, Cost Variance = Earned Value - Actual Cost. Cost variance will be calculated as $40,000 - $60,000, which equals to -$20,000. The negative value here shows that we've spent $20,000 more than the planned amount, and thus the project is over budget. Similarly, if we use the schedule variance formula, Schedule Variance = Earned Value - Planned Value. Schedule variance will be calculated as $40,000 - $50,000, which is equal to -$10,000. The negative value here shows that the project is also behind schedule.