1. Project Cost Management
Sections of this presentation were adapted from A Guide to the Project
Management Body of Knowledge 5th Edition, Project Management Institute
Inc., © 2013

2. Project Cost Management
“The processes involved in planning, estimating, budgeting, and
controlling costs so that the budget can be completed within the
approved budget”

3. Why to 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
Cumulative
Value
Time
Planned
Value (PV)
Actual
Costs (AC)
Earned
Value (EV)
Today

4. 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
BAC – Budget at Completion, the budget for the total job
EAC –Estimate at Completion, what is the total job expected to cost?
ETC – Estimate to Complete, forecasted costs to complete job
VAC – Variance at Completion, how much over/under budget do we
expect to be?

5. How to Manage Cost?
Three processes
1. Estimate Costs
2. Determine Budget
3. Control Costs
Estimate
Costs
Determine
Budget
Control
Costs

6. Estimate Costs
Enterprise
Environmental
Factors
Organizational
Process Assets
Project Scope
Statement
 Analogous estimating
 Determine resource
cost rates
 Bottom up estimating
 Parametric estimating
 Project management
software
 Vendor bid analysis
 Reserve analysis
 Cost of quality
Inputs
Outputs
Tools & Techniques
Work Breakdown
Structure
WBS Dictionary
Project
Management Plan
•Schedule Mgmnt Pln
•Staffing Mgmnt Pln
•Risk Register
Activity Cost
Estimates
Activity Cost
Estimates
Supporting Detail
Requested Changes
Cost Management
Plan Updates
Estimate
Costs
Determine
Budget
Control
Costs

7. Estimating Methods
Analogous (Top Down) estimating – Managers use expert
judgment or similar project costs [quick, less accurate]
Bottom-Up estimating – People doing work estimate based
on WBS, rolled up into project estimate [slow, most
accurate]
Parametric estimating – Use mathematical model (i.e. cost
per sq ft). [accuracy varies] Two types:
– Regression analysis – based on analysis of multiple data points
– Learning Curve – The first unit costs more than the 100th, forecasts
efficiency gains

8. Estimating Methods
Vendor Bid Analysis – Estimating using bids + allowances
for gaps in bid scope [slow, accuracy depends on gaps]
Reserve Analysis – Adding contingency to each activity
cost estimates as zero duration item [slow, overstates cost]

9. Determine Budget
Project Scope Statement
 Cost aggregation
 Reserve analysis
 Parametric estimating
 Funding limit reconciliation
Inputs
Outputs
Tools & Techniques
Cost Baseline
Project Funding
Requirements
Cost Management
Plan Updates
Requested Changes
Work Breakdown Structure
WBS Dictionary
Activity Cost Estimates
Activity Cost Estimates
Supporting Detail
Project Schedule
Resource Calendars
Contract
Cost Management Plan
Estimate
Costs
Determine
Budget
Control
Costs

10. Determine Budget
Budgeting is allocating costs to work packages to
establish a cost baseline to measure project
performance
Remember Contingency items are for unplanned but
required changes it is not to cover things such as:
• Price escalation
• Scope & Quality Changes
Funding Limit Reconciliation – Smoothing out
the project spend to meet management expectations

11. Control Costs
Cost Baseline
Project Funding
Requirements
Performance
Reports
 Cost change control system
 Performance measurement
analysis
 Forecasting
 Project performance
reviews
 Project management
software
 Variance management
Inputs
OutputsTools & Techniques
Work Performance
Information
Approved Change
Requests
Project
Management Plan
Cost Estimate
Updates
Cost Baseline
Updates
Performance
Measurements
Forecasted
Completion
Requested Changes
Recommended
Corrective Actions
Organizational
Process Assets
Updates
Project Management
Plan Updates
Estimate
Costs
Determine
Budget
Control
Costs

12. The Earned Value Chart
 One way of measuring overall performance is by using
an aggregate performance measure called earned value
 The basic definition of earned value management (EVM)
is that the value of a piece of work is equal to the amount
of funds budgeted to complete it.

13. The Earned Value Chart
 The earned value of work performed (value completed)
for those tasks in progress is found by multiplying the
estimated percent completion for each task by the planned
cost for that task
 The result is the amount that should have been spent on
the task so far
 The concept of earned value combines cost reporting and
aggregate performance reporting into one comprehensive
chart

14. Earned Value Chart
Progress is compared against the baseline
to determine whether project is ahead of
or behind plan
Percent complete can be difficult to
measure, some managers use rules
• 50/50 Rule – Assumed 50% complete when
task started, final 50% at completion
• 20/80 Rule – 20% at start
• 0/100 Rule – No credit until complete

15. The Earned Value Chart
Graph to evaluate cost and performance to date
www.humphreys-assoc.com

16. The Earned Value Chart
Variances on the earned value chart follow two primary guidelines:
• 1. A negative is means there is a deviation from plan— not good!
• 2. The cost variances are calculated as the earned value minus some other
measure
EV - Earned Value: budgeted cost of work performed
AC - Actual cost of work performed
PV - Planned Value: budgeted cost of work scheduled
ST - scheduled time for work performed
AT - actual time of work performed

17. The Earned Value Chart
EV - AC = cost variance (CV, overrun is negative)
EV - PV = schedule variance (SV, late is negative)
ST - AT = time variance (TV, delay is negative)
If the earned value chart shows a cost overrun or performance
underrun, the project manager must figure out what to do to get the
system back on target
Options may include borrowing resources, or holding a meeting of
project team members to suggest solutions, or notifying the client that
the project may be late or over budget

18. Schedule and cost variances and performance
indicators
Schedule and cost variances and performance indicators are defined
mathematically as follows:
 Schedule variance (SV) = Earned value (EV) – Planned value (PV)
 Cost variance (CV) = Earned value (EV) – Actual cost (AC)
 Time Variance (TV, delay is negative): scheduled time (ST) -Actual Time
( AT)
 Schedule performance index (SPI) = Earned value (EV) / Planned
value (PV)
 Cost performance index (CPI) = Earned value (EV) / Actual cost (AC)

20.  If the earned value chart shows a cost
overrun or performance underrun, the project
manager must figure out what to do to get
the system back on target
 Options may include borrowing resources, or
holding a meeting of project team members
to suggest solutions, or notifying the client
that the project may be late or over budget

21. Assessing Task Performance
The final step when assessing task performance to date is to update what
you expect your total expenditures will be upon task completion.
Specifically, you want to determine the following:
Estimate at completion (EAC): Your estimate today of the total cost of
the task
Estimate to complete (ETC): Your estimate of the amount of funds
required to complete all work still remaining to be done on the task

22. EAC Calculation: Method 1
Assume that the cost performance for the remainder of the
task will revert to what was originally budgeted.
EAC = Approved budget for the entire task – Cost
variance for the work done to date on the task
= Budget at completion (BAC) + Actual cost (AC) –
Earned value (EV)

23. EAC Calculation: Method 2
Assume that the cost performance for the remainder of the
task will be the same as what it has been for the work
done to date.
EAC = Budget at completion (BAC) / Cumulative cost
performance index (CPI)

24. ETC Calculation
Whether you use Method 1 or Method 2 to calculate
EAC, ETC is determined as follows:
ETC = Budget at completion (BAC) – Actual costs to
date (AC)

25. Example Question
Planned $1800 to complete work package.
Scheduled to have been finished today.
Actual expenditure to date is $1470.
Estimate work is 2/3 complete.
What are cost and schedule variances?

26. Cost variance
Cost variance = EV – AC
= $1800(2/3) - $1470
= $1200 - $1470
= -$270

27. Schedule variance
Schedule variance = EV – PV
= $1800(2/3) - $1800
= -$500

28. SPI (schedule performance index)
SPI = EV/PV
= ($1800(2/3))/$1800
= $1200/$1800
= 0.67

29. CPI (cost performance index)
CPI = EV/AC
=($1800/(2/3) / $1470)
= 1200/1350
= 0.82

30. ETC and EAC
Estimate to complete = (BAC-EV)/CPI
=(1800-1200)/.82
= $732
Estimate at completion = ETC + AC
= $732+ $1470
= $2202

31. Notice
 EV is always first
 Variance = EV minus something
 Index = EV divided by something
 If the formula relates to cost use AC
 If the formula relates to schedule use PV
 Interpreting results: negative is bad and positive is
good
 Interpreting results: greater than one is good, less
than one is bad
PV
AC ETC
EAC
BAC
Project
Start
Current
Status