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Notes on Cost Management

  • Reserve Analysis
    • Evaluates the amount of contingency as compared to the amount of risk remaining on the project
    • Budget contingency reserve (contingency) is funding that is allocated for “known-unknowns” (identified risks). Contingency is managed by the project manager and is included in the cost baseline.
    • Management reserve, controlled by the project sponsor, is for “unknown-unknowns” (unidentified risks). Management reserve is not included in the cost baseline but is a component of the overall project budget. Management reserve may be used for major scope changes, unidentified or black swan risks, or other circumstances outside of the control of the customer or the project team.
  • Cost Baseline
    • Time-phased budget used as the basis to measure, monitor and control the cost performance, detailing the periodic and cumulative planned value of the work to be completed
    • Component of the project management plan
    • Typically displayed in an S-curve graph, with the budget at completion (BAC) as the end point. Periodic points of the S-curve graph represent the planned value (PV) of the work to be completed, cumulatively, as of that date.
  • Planned Value (PV)
    • The dollar value of the work planned to be completed to date
    • Cumulative from the start date through the status date
  • Actual Cost (AC)
    • The actual money spent on the project to-date
    • Cumulative from the start date through the status date
  • Earned Value (EV)
    • Value earned based on the percentage complete of the budgeted work
    • Earned Value (EV) = budget at completion (BAC) x % complete
    • Percentage complete can either be time-based or effort-based
  • Earned Value Calculations
    • Schedule Variance (SV) = earned value – planned value
    • Schedule Performance Index (SPI) = earned value ÷ planned value
    • Cost Variance (CV) = earned value – actual cost
    • Cost Performance Index (CPI) = earned value ÷ actual cost
  • To-Complete Performance Index (TCPI)
    • Efficiency ratio comparing work remaining to money remaining
    • Work remaining is calculated as the budget at completion (BAC) minus the earned value (EV)
    • Money remaining may be calculated using the budget (BAC) or the forecast (EAC) minus the actual costs (AC)
    • TCPI = (BAC-EV) ÷ (BAC-AC)    or   TCPI = (BAC-EV) ÷ (EAC-AC)
  • Forecasting – Estimate to Complete/Estimate at Completion
    • Estimate to Complete (ETC) is the estimated remaining costs from this point forward, not including actual costs (AC)
    • Estimate at Completion (EAC) is the estimated overall project costs at the completion of the project including actual costs (AC)
    • There are multiple calculations used to determine the EAC:
    • Bottom-up, when there is no variance noted: EAC = estimate to complete (ETC) + actual costs (AC)
    • Atypical (one-time) variance:  EAC = actual costs (AC) + budget at completion (BAC) – earned value (EV)
    • Typical (recurring) variance: EAC = budget at completion (BAC) ÷ cost performance index (CPI)
    • EAC calculation considering both SPI and CPI: EAC = AC + ((BAC-EV)/(CPIxSPI))
  • Analogous Estimating
    • Uses a previous similar project as a basis for the current estimate
    • Leverages both historical information and expert judgment
    • Used in both duration and cost estimating
    • Also known as top-down
  • Parametric Estimating
    • Uses a statistical relationship between historical data and other variables to determine a unit cost or productivity rate
    • Used in both duration and cost estimating
  • Three–Point Estimating
    • Uses Optimistic, Pessimistic, and Most-likely estimates to calculate a weighted average,
    • There are two variations: beta likes so (O+4M+P)/4 and triangular like so (O+M+P)/3
    • Used in both duration and cost estimating