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PowerPoint Presentation SBM1201 Project Scope, Time and Cost Management Week 8 1 Project Cost Management 2 Types of Costs Assuming work packages are defined and resources are assigned, then detailed cost estimates can be made. Here are typical kinds of costs found in a project: Direct costs Labour Materials Equipment Other Direct project overhead costs General and administrative (G&A) overhead costs 3 Types of costs A cost can be either variable or fixed Variable costs: these costs change within the amount of work Examples: the cost of material, supplies and wages Fixed costs: these costs do not change as production change Examples: cost of setup, rent, utilities A cost can be direct or indirect Direct Cost: theses costs are directly attributed to the work on the project Examples: team wages, team travel and recognition expense, costs of material used o the project Indirect costs: are overehead items or costs incurred for the benefit of more than one project Example: taxes, fringe benefits and janitorial services 4 Types of Costs (Contd.) 1- Direct costs These costs are clearly chargeable to a specific work package They are immediate out-of pocket expenses Can be influenced by the project manager, project team, and individuals implementing the work package These costs represent real cash outflows and must be paid as the project progresses They are usually separated from overhead costs. Lower-level project rollups (work packages, cost account in WBS) frequently include only direct costs. 5 Types of Costs (Continue) 1- Direct costs (contd.) Examples: Labour: hours and hourly rates= $35,000 Materials: steel, concrete = $20,000 Equipment: excavator, crane = $25,000 Direct costs= 35,000+ 20,000+25,000= $80,000 6 Types of Costs (Contd.) 2- Direct Project Overhead Costs Are the resources of the organization used in the project Can be tied to project deliverables or work packages Not an immediate out-of-pocket expense, but it is real and must be covered in the long run if the firm is to remain viable These rates are usually a ratio of the dollar value of the resources used—e.g., direct labour, materials, equipment. E.g. the salary of the project manager, temporary rental space for the project team 7 Types of Costs (Contd.) 2- Direct Project Overhead Costs (contd.) For example, a direct labour rate of 20% would add a direct overhead charge of 20 percent to the direct labour cost estimate. . Labour: hours and hourly rates ($35,000) Materials: steel, concrete ($20,000) Equipment: excavator, crane ($25,000) Direct costs= 35,000+ 20,000+25,000= $80,000 Direct overhead cost (20% of Labour)=35,000 X 0.2= $7000 Total direct costs= direct costs + direct overhead costs= 80,000 +7,000= $87,000 8 PROJECT 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 Project Management Book of Knowledge (PMBOK) defines the four project cost management processes as follows: Plan Cost Management—The process of defining how the project costs will be estimated, budgeted, managed, monitored, and controlled. Estimate Costs—The process of developing an approximation of the monetary resources needed to complete project work. Determine Budget—The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. Control Costs—The process of monitoring the status of the project to update the project costs and manage changes to the cost baseline. 9 PROJECT COST MANAGEMENT- PMBOK 10 Project Cost Management processes 1) Plan Cost Management 2) Estimate Costs 3) Determine Budget 4) Control Costs Planning process group Planning process group Planning process group Monitoring and Controlling process group The cost management processes Done during 11 1- PLAN COST MANAGEMENT Is the process of defining how the project costs will be estimated, budgeted, managed, monitored, and controlled. The key benefit of this process is that it provides guidance and direction on how the project costs will be managed throughout the project. This process is performed once or at predefined points in the project 12 Project charter includes high level project costs Organisational assets used in this process which includes cost data, lessons learned from previous project, organisational standards, and policies for estimating In some organisations, this process includes funding project methods (within organisation or external fund) 1- PLAN COST MANAGEMENT 13 The cost management plan may include the following: Specifications for how estimates should be stated (e.g. currency) The level of accuracy (e.g. AUS dollar) The level of precision needed for estimates (e.g. the degree to which cost estimates will be rounded up or down) Approved estimating techniques (e.g. top-down, bottom-up) Reporting format to be used (e.g. monthly, quarter) Rules for measuring cost performance (e.g. EVM, Variances) Guidance regarding whether costs will included indirect costs (cost not directly attributable to any one project, such as overhead cost) in addition to direct costs (those costs directly attributable to the project) Guidelines for the establishment of a cost baseline measuring against as part of project monitoring and controlling (the cost baseline will ultimately be established in Determining Budget) Control thresholds (Variance thresholds for monitoring cost performance) Information on control accounts or other ways to monitor spending on the project Funding decisions (internal, external) Methods for documenting costs Guidelines for dealing with potential fluctuation in resource costs and exchange rates Roles and responsibilities for various cost activities 14 Pricing Out The Work Using logical pricing techniques will help in obtaining detailed estimates. The following thirteen steps provide a logical sequence to help a company control its limited resources. These steps may vary from company to company. Step 1: Provide a complete definition of the work requirements. Step 2: Establish a logic network with checkpoints. Step 3: Develop the work breakdown structure. Step 4: Price out the work breakdown structure. Step 5: Review WBS costs with each functional manager. Step 6: Decide on the basic course of action. Step 7: Establish reasonable costs for each WBS element. Step 8: Review the base case costs with upper-level management. Step 9: Negotiate with functional managers for qualified personnel. Step 10: Develop the linear responsibility chart. Step 11: Develop the final detailed and PERT/CPM schedules. Step 12: Establish pricing cost summary reports. Step 13: Document the result in a program plan. 15 The list below shows the typical pricing reports: A detailed cost breakdown for each WBS element. If the work is priced out at the task level, then there should be a cost summary sheet for each task, as well as rollup sheets for each project and the total program. A total program manpower curve for each department. These manpower curves show how each department has contracted with the project office to supply functional resources. If the departmental manpower curves contain several “peaks and valleys,” then the project manager may have to alter some of his schedules to obtain some degree of manpower smoothing. Functional managers always prefer manpower-smoothed resource allocations. A monthly equivalent manpower cost summary. This table normally shows the fully burdened cost for the average departmental employee carried out over the entire period of project performance. If project costs have to be reduced, the project manager performs a parametric study between this table and the manpower curve tables. A yearly cost distribution table. This table is broken down by WBS element and shows the yearly (or quarterly) costs that will be required. This table, in essence, is a project cash-flow summary per activity. Pricing Out The Work 16 A functional cost and hour summary. This table provides top management with an overall description of how many hours and dollars will be spent by each major functional unit, such as a division. Top management would use this as part of the forward planning process to make sure that there are sufficient resources available for all projects. This also includes indirect hours and dollars. A monthly labour hour and dollar expenditure forecast. This table can be combined with the yearly cost distribution, except that it is broken down by month, not activity or department. In addition, this table normally includes manpower termination liability information for premature cancellation of the project by outside customers. Pricing Out The Work 17 A raw material and expenditure forecast. This shows the cash flow for raw materials based on vendor lead times, payment schedules, commitments, and termination liability. Total program termination liability per month. This table shows the customer the monthly costs for the entire program. This is the customer’s cash flow, not the contractor’s. The difference is that each monthly cost contains the termination liability for man-hours and dollars, on labour and raw materials. This table is actually the monthly costs attributed to premature project termination. Pricing Out The Work 18 The Pricing Review Procedure (Kerzner, 2017. P593) 19 Estimating High-risk Projects A common technique used to estimate high-risk projects is the “rolling wave” or “moving window” approach. (Kerzner, 2017. P602) 20 2- Estimate Costs Estimate Costs is the process of developing an approximation of the cost of resources needed to complete project work. The key benefit of this process is that it determines the monetary resources required for the project. This process is performed periodically throughout the project as needed. 21 A cost estimate is a quantitative assessment of the likely costs for resources required to complete the activity. It is a prediction that is based on the information known at a given point in time. Cost estimates include the identification and consideration of costing alternatives to initiate and complete the project. Cost estimates are generally expressed in units of some currency (i.e., dollars, euros, yen, etc.), although in some instances other units of measure, such as staff hours or staff days, are used to facilitate comparisons by eliminating the effects of currency fluctuations. Cost estimates should be reviewed and refined during the course of the project to reflect additional detail as it becomes available and assumptions are tested. The accuracy of a project estimate will increase as the project progresses through the project life cycle. For example, a project in the initiation phase may have a rough order of magnitude (ROM) estimate in the range of −25% to +75%. Later in the project, as more information is known, definitive estimates could narrow the range of accuracy to −5% to +10%. In some organizations, there are guidelines for when such refinements can be made and the degree of confidence or accuracy that is expected. 2- Estimate Costs 22 What costs to be estimated Costs are estimated for all resources that will be charged to the project. This includes but is not limited to: labour materials equipment services, and facilities, Costs of quality efforts Costs