**Some Cost Review Points**

§ sunk cost – cost already incurred in the past and cannot be
recovered, do not consider anymore

§ opportunity cost – difference in value between one path vs
alternative (= 100% of value of next best alternative)

§ value analysis/ engineering – cost reduction without affecting
the scope

§ Benefit Cost Analysis (BCA) / Cost Benefit Analysis (CBA) –
determine feasibility, bigger benefit/cost ratio (BCR)

§ Payback Period – the length of time to recover the investment

§ Return on Investment (ROI) – the efficiency of investment =
(Gain-Cost)/Cost

§ Time Value of Money – Present Value (PV) = value / (1+interest
rate)*year, Future Value (FV) = value * (1+interest rate)*year

§ Net Present Value (NPV) = PV of cash inflows – PV of cash outflows (cost)

§ funding for project: self-fund, funding with equity, funding
with debts

§ discount rate – rate used to calculate present value of
expected yearly benefits and costs

##
Plan Cost Management

§ The Cost Management Plan establishes: i) level of accuracy and
level of precision, ii) unit of measurement, iii) WBS procedure links (to
control account (CA)), iv) control threshold, v) earned value rules of performance,
reporting, funding and processes

§ Life cycle costing = total cost of ownership : production cost, running and
maintenance cost, etc.

##
Estimate Costs

§ similar to Estimate Activity Resources

§ look for ways to reduce cost

§ ensure the SME to deliver the estimates (more accurate)

§ based on WBS

§ Cost Types

§ Variable costs – costs change with the amount of work,
e.g. hourly consultants

§ Fixed costs – costs that are constant, e.g. equipment
leases

§ Direct costs – directly attributed to the project

§ Indirect costs – shared costs like AC, lighting, etc.

§ Cost Estimate Tools

§ Analogous Estimating (Top Down Estimate) – compare to a similar project in
the past (an estimating heuristic/rule of thumb)

§ Parametric Estimating – use a parameter and repetitive units of identical
work

§ Bottom-up Estimating – detailed estimates of each individual activity from
historical data, more accurate and time-consuming

§ Activity Cost Estimates may include indirect cost and
contingency reserves

§ usually in a range of values

§ Basis of Estimates – detailed analysis on how the cost
estimate was derived (assumptions, constraints, possible range (+/-15%),
confidence level of final estimate)

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Determine Budget

§

**Budget**is more about**when**to spend money
§

**Historical Relationships**– analogous/parametric estimation
§

**Reserve Analysis**– addresses**Management Reserve**(unknown unknowns) and**Contingency Reserve**(known risks) [**not**included in calculation of earned value managment]
§

**Funding Limit Reconciliation**– addresses variance between funding limit (e.g. monthly or yearly limit) and planned expenditure, may require**rescheduling**of work to level of the rate of expenditure
§

**Value Engineering**– to improve quality/shorten schedule without affecting the**scope**
§

**Project Budget = Cost baseline (**the approved**time-phased**budget**) + Management Reserve**
§ when management reserve is

**used**during project execution,**the amount is added to the cost baseline**
§

**S-curve**: total project expenditure over project lifecycle##
Control Costs

§ Check against the

**Project Funding Requirements**
§ including informing stakeholders of all approved changes and
their costs

§ Earned Value Calculation

§ Index > 1: under budget/ahead of schedule

§ Index < 1: over budget/behind schedule

§ Estimate at Complete: 1) new estimate required (original
flawed), 2) no BAC variance, 3) CPI will continue, 4) sub-standard
cost/schedule will continue

§ TCPI:

**>1**not enough funding remain (**over budget**),**<1**more fund available than needed (**under budget**)
§

**Earned Value Accrual**
§

**Discrete Efforts**– describes activities that can be planned/measured for output, including**Fixed Formula**(activity given a % of budget of work package at**start**and earn the remaining when completed, e.g. 50/50, 20/80 or 0/100),**Weighted Milestone**(earn value for milestones of deliverables of the work package),**Percentage Complete**,**Physical Measurement**
§

**Apportioned Efforts**– describes work that has a direct/supporting relationship to discrete work, e.g. testing, pm activities, calculated as % of the discrete work
§

**Level of Efforts (LOE)**– describes activities without deliverables, e.g. troubleshooting, assigned the earned value as scheduled,**without schedule variance**but may have cost variance
§ e.g. perform Control Cost weekly during execution where money is
spent fastest

§ Variance Analysis – to check against the baseline for any
variance

§

**SPI at end of project must be 1**
§

**SPI is NOT telling much information to whether the project is on schedule as the Critical Path must also be investigated to get a meaningful picture**
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