Project Cost Management

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Project Cost Management

In project management , Project Cost management involves planning, budgeting, and managing the expenses of organizational activities. Cost management doesn’t happen in isolation; it requires the acquisition of information and input from execution teams and key stakeholders.

Cost is a term that encompasses the necessary processes used to estimate expenses and budgets during the execution of activities.

Project Cost management should ideally be integrated into the initial stages of organizational activity planning to create a framework for all cost management activities. This ensures that the budgeted costs are not exceeded.

Many financial techniques, such as Return on Investment (ROI), Payback, and Cash Flow, are used in Project cost management process.

Project cost management knowledge area in the planning phase includes three processes:

1. Plan project Cost Management : This process involves planning how costs will be managed within the project.
2. Estimate Costs: In this step, the costs of various project activities are estimated.
3. Determine Budget: Here, the project’s budget is established based on the cost estimates.

In the Monitor & Control phase, there is the process of Control Costs, which involves tracking and managing project costs. Let’s delve into a more detailed explanation of each of these processes for a more comprehensive understanding.

Plan project Cost Management is a process that can establish the framework, policies, and methods for evaluating and managing costs, providing a comprehensive description of how cost management processes will be carried out. This planning process includes a detailed explanation of project cost planning, estimation, and control. The output of Plan project Cost Management is the Project Cost Management Plan, which is a part of the overall Project Management Plan.

The primary advantage of this process lies in providing suitable guidance for how to manage costs from the beginning to the end of a project. To plan for project cost management , it’s essential to understand how the project will be funded.

Project financing, or in other words, the organization’s investment, can take three forms:

1. Self-funding: The organization invests capital separately.
2. Funding with equity: Finding an investor to provide capital.
3. Funding with debt: Investment is made through loans or borrowing.

The Project Cost Management Plan specifies several key aspects, including:

1. Units of measure: This defines how costs will be quantified or measured, such as currency units, labor hours, or materials.
2. Level of precision: It outlines the degree of accuracy required in cost estimates and calculations. This is the extent to which the numbers should be detailed.
3. Level of accuracy: This specifies the required degree of correctness or closeness to reality in cost estimates.
4. Control thresholds: These are predetermined limits or values used to monitor and control costs. If costs exceed these thresholds, corrective actions are initiated.
5. Reporting formats: It determines how cost-related information will be presented in reports, ensuring consistency and clarity in reporting.
6. Organizational procedures links: This refers to how the cost management plan connects to the organization’s existing procedures and processes, ensuring alignment with internal standards.
7. Rules of performance measurement: These are guidelines that define how performance will be measured in terms of cost control and management.

The distinction between ” Precision ” and ” Accuracy ” is important:

• Precision : It refers to how consistent and reproducible the results of a previous task are. In cost management, it may indicate how consistently a particular task is performed.
• Accuracy : It concerns the correctness and closeness to the true value. In cost management, accuracy is about how closely the estimated or reported costs align with the actual costs.

Now, let’s explore the inputs, tools, techniques, and outputs related to the Project Cost Management Plan:

Inputs:

1. Charter : The project charter provides the high-level project description and objectives.
2. Management plan :
   • Schedule management plan : This plan defines how project scheduling is managed.
   • Risk management plan : It outlines how risks will be identified, assessed, and managed.
3. Enterprise environmental factors : These are external factors that can influence cost management, such as market conditions and legal regulations.
4. Organizational process assets : These are internal resources, such as templates, historical cost data, and policies, that impact the cost management process.

The Project Cost Management Plan is an essential component of project management, ensuring that costs are effectively controlled and managed throughout the project’s lifecycle. 

In the context of “Tools & Techniques,” there are several methods and approaches used for developing the Project Cost Management Plan:

1. Expert judgment : This involves seeking input and advice from experts or specialists in cost management. They provide valuable insights and recommendations.
2. Data analysis : Data analysis involves examining relevant information, such as historical cost data, to make informed decisions and estimates.
3. Meetings : Meetings are conducted to discuss and collaborate on cost management planning. They allow project stakeholders to share their perspectives and make collective decisions.

Regarding the “Outputs,” the primary output is the Project Cost Management Plan, which is a comprehensive document outlining how costs will be managed throughout the project’s life cycle.

When planning for Project cost management , two main activities are typically carried out:

1. Life Cycle Costing : This approach not only considers the costs associated with project activities but also examines the total life cycle costs of a product. It aims to determine the expenses that the product incurs throughout its useful life.
2. Value Analysis : Value analysis is focused on finding alternative ways to reduce the cost of the work being performed. It is essential to ensure that these cost-saving alternatives do not compromise performance or quality.

For example : a raw material supplier offering a special discount for bulk purchases is a cost-saving strategy. In such a situation, you would buy the required materials at a lower cost without compromising the original quality.

Effective Project cost management and these techniques contribute to the success of a project by ensuring that resources are used efficiently and that the project remains within budget.

Estimate Cost is the process of creating an approximate monetary value for each project activity. It predicts, based on the available information, how much it will cost to complete the project activities. The primary advantage of this process is determining the financial resources required to finish the project.

During cost estimation, it’s crucial to specify the type of costs involved.

Project costs are typically divided into four categories in project cost management :

1. Direct Cost : These costs are directly related to the specific project work. The source of these costs is clear, and they can be attributed to particular project activities. Examples include travel expenses for the project team, team member salaries, and more.
2. Indirect Cost : Indirect costs consist of overhead or miscellaneous expenses that ultimately contribute to the organization’s overall profitability. Examples include office rent, administrative staff salaries, taxes, and quality-related costs. These costs are not easily attributable to specific activities.
3. Fixed Cost: Fixed costs do not change with variations in project volume or production levels. Examples include office rent and equipment costs.
4. Variable Cost: Variable costs fluctuate in proportion to changes in production volume or project workload. Examples include raw material costs, resource costs, and variable labor expenses.

It’s essential to determine whether you need to consider both direct and indirect costs when estimating expenses. To estimate costs, you need to examine the project schedule to determine the resource requirements for each activity.

Cost estimation is a critical aspect of project planning, as it helps in setting realistic budgets, allocating resources, and ensuring that the project remains financially viable.

The Estimate Cost process involves various inputs, tools, and techniques to develop cost estimates for project activities. It aims to create approximate monetary values for each activity, helping in budgeting and resource allocation.

Here’s an overview of the inputs, tools and techniques, and outputs:

Inputs:

1. Management Plan:

   • Cost Management Plan: This plan outlines how cost management will be performed.
   • Quality Management Plan: It provides insights into how quality-related costs are managed.
   • Scope Baseline: The scope baseline includes the project’s approved scope statement, work breakdown structure (WBS), and WBS dictionary, which is essential for estimating costs.

2. Organizational Documents:

   • Lessons Learned Register: Historical information from past projects can be valuable in cost estimation.
   • Schedule: The project schedule helps determine resource requirements and timing.
   • Resource Requirement: Understanding resource needs is crucial for accurate cost estimation.
   • Risk Register: The risk register contains information about potential risks and uncertainties that can affect project costs.

3. Enterprise Environmental Factors:

   • External factors such as market conditions and economic factors can impact cost estimation.

4. Organizational Process Assets:

   • These assets include historical cost data, templates, and other tools that aid in the estimation process.

Tools & Techniques:

1. Expert Judgment: Seek input from experienced professionals or experts in cost estimation.
2. Analogous Estimating: Use historical data from similar projects to estimate costs.
3. Parametric Estimating: Use statistical relationships and parameters to estimate costs based on historical data.
4. Bottom-up Estimating: Develop detailed estimates for individual work packages or activities and then aggregate them to obtain a project total.
5. Three-Point Estimating: This method involves using optimistic, pessimistic, and most likely estimates to calculate an expected cost.
6. Data Analysis:
   • Alternative Analysis: Evaluate various alternatives and their associated costs.
   • Reserve Analysis: Assess contingency and management reserves for dealing with uncertainties.
   • Cost of Quality: Evaluate the costs associated with ensuring product or service quality.
7. Management Information System: Utilize software and systems for cost data management and analysis.
8. Decision Making: Incorporate cost estimates into project decision-making processes, such as project selection and resource allocation.

Outputs:

The primary output of the Estimate Cost process is the estimated cost for each activity. These estimates help in developing the project budget, allocating resources, and tracking project financial performance.

Estimating costs accurately is essential for effective project management, as it ensures that projects are adequately funded and resources are allocated efficiently. If you have any further questions or specific SEO optimization needs, please feel free to ask.

The Estimate Cost process involves various inputs, tools, and techniques to develop cost estimates for project activities. It aims to create approximate monetary values for each activity, helping in budgeting and resource allocation. Here’s an overview of the inputs, tools and techniques, and outputs:

Inputs:

1. Management Plan:

   • Cost Management Plan: This plan outlines how cost management will be performed.
   • Quality Management Plan: It provides insights into how quality-related costs are managed.
   • Scope Baseline: The scope baseline includes the project’s approved scope statement, work breakdown structure (WBS), and WBS dictionary, which is essential for estimating costs.

2. Organizational Documents:

   • Lessons Learned Register: Historical information from past projects can be valuable in cost estimation.
   • Schedule: The project schedule helps determine resource requirements and timing.
   • Resource Requirement: Understanding resource needs is crucial for accurate cost estimation.
   • Risk Register: The risk register contains information about potential risks and uncertainties that can affect project costs.

3. Enterprise Environmental Factors:

   • External factors such as market conditions and economic factors can impact cost estimation.

4. Organizational Process Assets:

   • These assets include historical cost data, templates, and other tools that aid in the estimation process.

Tools & Techniques:

1. Expert Judgment: Seek input from experienced professionals or experts in cost estimation.
2. Analogous Estimating: Use historical data from similar projects to estimate costs.
3. Parametric Estimating: Use statistical relationships and parameters to estimate costs based on historical data.
4. Bottom-up Estimating: Develop detailed estimates for individual work packages or activities and then aggregate them to obtain a project total.
5. Three-Point Estimating: This method involves using optimistic, pessimistic, and most likely estimates to calculate an expected cost.
6. Data Analysis:
   • Alternative Analysis: Evaluate various alternatives and their associated costs.
   • Reserve Analysis: Assess contingency and management reserves for dealing with uncertainties.
   • Cost of Quality: Evaluate the costs associated with ensuring product or service quality.
7. Management Information System: Utilize software and systems for cost data management and analysis.
8. Decision Making: Incorporate cost estimates into project decision-making processes, such as project selection and resource allocation.

Outputs:

The primary output of the Estimate Cost process is the estimated cost for each activity. These estimates help in developing the project budget, allocating resources, and tracking project financial performance.

Estimating costs accurately is essential for effective project management, as it ensures that projects are adequately funded and resources are allocated efficiently.

1. Cost estimates :These are approximations of the expenses associated with a particular project or task. Cost estimates are used to plan and allocate resources effectively.
2. Basis of estimates : This refers to the foundation or rationale for the cost estimates. It includes the assumptions and data used to calculate and justify the estimated costs.
3. Organization document updates: This involves making revisions or changes to documents and materials within an organization. It can include updating policies, procedures, or other relevant documents.

Now, here are some additional terms :

• Assumption log : A record of the assumptions made during a project. This log helps in tracking and validating assumptions to ensure the project stays on the right track.
• Lessons learned register : This is a compilation of insights gained from past projects. It’s used to avoid repeating mistakes and apply successful strategies to future endeavors.
• Risk register : A list of potential risks associated with a project, along with their descriptions and mitigation strategies. It helps project managers identify, assess, and manage risks effectively.

These terms are commonly used in project Cost management and organizational contexts.

Different types of estimating techniques into English:

1. Analogous Estimating: In this method, previously completed activities are used as a basis for estimating similar activities. Experts use this method when they have information from the organization. This method is also known as “top-down estimating.”
2. Parametric Estimating: This method is also called parametric or metric estimation. For example, if the cost of wallpaper installation is 50,000 Tomans per square meter, the cost for a 100-square-meter hall would be estimated at 500,000 Tomans. (The price is related to the year 1395 in this example.) In this method, mathematical models or calculations are used to determine the cost of activities.
3. Bottom-up Estimating: In this method, work is done based on the available Work Breakdown Structure (WBS). If the lowest level of the WBS is broken down to the activity level, cost estimation starts from those activities and moves upward. The same process is repeated when the WBS is broken down to the level of Work Packages.

If you need further information or have specific questions about any of these estimating techniques, please feel free to ask.

Cost estimation titles:

1. Contingency Reserves: Contingency reserves refer to a portion of the budget set aside to address risks that may arise during the project.
2. Vendor Bid Analysis: Vendor bid analysis is one of the precise methods for cost estimation. It involves conducting a tender and obtaining detailed cost estimates from sales representatives. By subtracting profits from these costs, it becomes easy to estimate the expenses. If this analysis, performed on qualified vendors, reveals a significant difference in cost estimates, it may indicate that the scope of work is not well-defined. If third-party vendors are used, the manager must ensure that their estimated costs are also included in the budget.
3. Activity Cost Estimate: In this method, known information up to the present day is used for estimating the costs of activities.

To support the cost estimation of activities, pay attention to the following five aspects, considered as part of the details:

• Basis of estimation
• Assumptions
• Constraints
• Range of possible estimates
• Confidence level of the final estimate

If you have further questions or need more information on any of these topics, please feel free to ask.

Costs can be estimated according to the following 3 items:

1. Rough Order of Magnitude (ROM) Estimates: This method is used when no information is available about the project. The range of deviation for this estimation is typically -25% to 75%. However, this range can vary depending on the amount of project-related information available at the time of estimation.
2. Budget Estimate: This type of estimation is usually done in the planning phase and typically has a deviation range of -10% to 25% from reality.
3. Definitive Estimate: This type of estimate is of high importance and is used during the project execution phase. It aims to have all estimates match the actual costs. Some project managers consider a deviation range of +/-5%, while others might use -5% to 10% as the acceptable range for estimate deviations from reality.

Determine Budget: Determining the budget is the process of collecting individual activity or work package cost estimates to establish the project’s cost baseline. The main advantage of this process is that it sets the cost baseline based on project performance measurements.

Now, let’s look at the inputs, tools, techniques, and outputs of this process:

• Inputs: These are the pieces of information and data that are used to determine the budget. Inputs can include project cost estimates, project schedule, risk register, resource calendars, and other relevant project documentation.
• Tools and Techniques: The tools and techniques used in the process of determining the budget can include cost aggregation, expert judgment, historical information, and funding limit reconciliation. Cost aggregation involves rolling up all the cost estimates from individual activities or work packages to create the overall project budget.
• Outputs: The primary output of this process is the project budget. The budget sets the baseline for project cost control and is used as a reference to measure and manage project performance. It provides a detailed breakdown of the expected project costs.

If you have further questions or need more details about any specific aspect of this topic, please feel free to ask.

The Inputs for the process of Determine Budget in Project cost management include various documents, plans, and other factors that provide essential information and context for establishing the project budget.

Here is a breakdown of the inputs :

1. Project Management Plan:

   • Cost Management Plan: This plan outlines how project costs will be managed, monitored, and controlled throughout the project.
   • Resource Management Plan: This plan details how project resources, including human and material resources, will be acquired and used.
   • Scope Baseline: The scope baseline defines the project’s scope, including the project’s deliverables and work breakdown structure (WBS).

2. Project Documents:

   • Basis of Estimates: These are the foundational assumptions and reasoning behind the cost estimates. They provide the basis for the budget.
   • Cost Estimates: These estimates contain the expected costs associated with various project activities and components.
   • Project Schedule: The project schedule provides the timing and sequencing of project activities.
   • Risk Register: This document lists and describes potential risks and their characteristics.

3. Business Documents:

   • Business Case: The business case justifies the project and defines its strategic objectives, expected benefits, and alignment with business goals.
   • Benefits Management Plan: This plan outlines how the benefits of the project will be identified, measured, and realized.

4. Agreements:

   • Agreements include any contracts, memoranda of understanding, or other agreements that have an impact on project costs.

5. Enterprise Environmental Factors:

   • These factors encompass external conditions and influences that may affect project costs, such as industry standards, market conditions, and economic trends.

6. Organizational Process Assets:

   • Organizational process assets are the documented procedures, templates, and historical information specific to the organization. These assets help in the budgeting process by providing guidelines and benchmarks.

All of these inputs are critical in creating an accurate project budget, as they provide the necessary data, guidelines, and context for estimating and managing project costs.

The Tools & Techniques and Outputs for the Determine Budget process of project cost management are essential elements for establishing the project budget.

Here’s a breakdown of the tools and techniques, as well as the outputs, as you’ve described:

Tools & Techniques:

1. Expert Judgment: Expert judgment involves seeking input and advice from knowledgeable individuals, such as subject matter experts, to make informed cost-related decisions.
2. Cost Aggregation: Cost aggregation is the process of adding up individual cost estimates from various project components, activities, or work packages to determine the overall project budget.
3. Data Analysis:
   • Reserve Analysis: This technique involves analyzing and allocating reserves, both management reserves and contingency reserves, as part of the budgeting process to account for unexpected costs.
4. Historical Information Review: Reviewing historical project data and cost records can provide valuable insights for creating more accurate cost estimates.
5. Funding Limit Reconciliation: This technique involves ensuring that the project budget aligns with the available funding limits and constraints.
6. Financing: Financing involves assessing how the project will be funded, considering various financing options and sources of funds.

Outputs:

1. Cost Baseline: The cost baseline is the approved budget that is allocated based on the approved project schedule. It informs project managers how much budget should be expended at any given point in time.
2. Project Funding Requirements: This output outlines the total funding required for the project. It’s a summary of the budget needs for the entire project.
3. Project Documents Updates:
   • Cost Estimates: The cost estimates are updated to reflect any changes or refinements in the budgeting process.
   • Project Schedule: The project schedule is also updated to ensure it aligns with the budget.
   • Risk Register: The risk register may be updated to include any risks or uncertainties related to the budget.

Additionally, the outputs may include the following updates:

• Cost Aggregation: The aggregated cost information is updated to reflect the final project budget.
• Funding Limit Reconciliation: The reconciliation process ensures that the budget adheres to specified funding limits.
• Control Account: Project managers operating at the control account level report and manage financial activities, often overseeing several work packages within their scope.
• Reserve Analysis: This analysis includes two parts, management reserves and contingency reserves, which provide flexibility to address potential project cost overruns.

These outputs and techniques are crucial for establishing and managing the project budget effectively. They help ensure that the project remains on track and that financial resources are allocated and utilized appropriately throughout the project’s life cycle.

The “Control Cost” process involves monitoring and managing actual project costs against the cost baseline, as well as controlling changes to the baseline. Here’s a breakdown of the inputs, tools and techniques, and outputs for this process, as you’ve described:

Inputs:

1. Project Management Plan:

   • Cost Management Plan: This plan outlines how project costs will be managed, monitored, and controlled.
   • Cost Baseline: The cost baseline represents the approved budget for the project.
   • Performance Measurement Baseline: It provides a basis for measuring and managing project performance.

2. Project Documents:

   • Lessons Learned Register: Information from past projects can provide valuable insights for controlling costs.
3. Project Funding Requirements: This document outlines the financial needs of the project.
4. Work Performance Data: This data includes information on the actual performance of project work.
5. Organizational Process Assets: These are internal organizational resources, such as policies, procedures, and historical project data.

Tools & Techniques:

1. Expert Judgment: Seek input and advice from knowledgeable individuals, such as subject matter experts, to make informed decisions.
2. Data Analysis:
   • Earned Value Analysis: A technique for comparing the planned progress with the actual progress in terms of cost performance.
   • Trend Analysis: Identifying trends in cost performance data to predict future performance.
   • Reserve Analysis: Analyzing both management and contingency reserves.
3. To-Complete Performance Index (TCPI): This index helps predict the required performance for the remaining work to achieve specific project objectives.
4. Project Management Information System (PMIS): PMIS is used for data collection, analysis, and reporting.

Outputs:

1. Work Performance Information: This output provides information on the actual performance of project work, including cost performance.
2. Cost Forecasts: Cost forecasts predict future costs based on current and past performance.
3. Change Request: Change requests may arise from cost control activities, and they are submitted for review and approval through the Perform Integrated Change Control process.
4. Project Management Plan Updates:
   • Cost Management Plan: Updates to the cost management plan may be necessary to reflect changes in cost control procedures or requirements.
   • Cost Baseline: If changes are approved, the cost baseline may need to be adjusted.
   • Performance Measurement Baseline: Similarly, changes in cost control may require updates to the performance measurement baseline.
5. Project Documents Updates:
   • Assumption Log: Updates may be made to the assumption log as new assumptions or changes to existing ones are identified.
   • Basis of Estimate: Updates to the basis of estimate may be necessary to reflect changes in cost estimation methods.
   • Cost Estimates: Cost estimates are updated to align with the latest information.
   • Lessons Learned Register: Any lessons learned during cost control activities are added to the register.
   • Risk Register: Updates may be made to the risk register to reflect changes in cost-related risks.

These outputs and tools help project managers control project costs, identify variances, and take corrective actions to keep the project on track and within budget.

Control Cost is a critical process in project cost management and it involves several key components :

1. Ensure that change requests are executed in a timely manner.
2. Request changes related to costs as needed.
3. Monitor cost performance and identify root causes of variances.
4. Monitor the cost of activities against the project budget.
5. Share cost performance reports with key stakeholders.
6. Ensure that costs do not exceed financial constraints.
7. Prevent unauthorized changes from utilizing the project budget.
8. Add additional costs to the project within acceptable limits.

To effectively control project costs, you can use three essential tools and techniques:

1. Variance Analysis: This technique allows you to identify the differences between actual costs and the costs from the project budget (cost baseline). It helps in understanding where cost variances exist and their potential impact on the project.
2. Return on Investment (ROI): ROI is a technique used to estimate the potential profitability of an investment. In the context of project management, it helps assess the value of the project against its costs.
3. Earned Value Management (EVM): EVM is a comprehensive methodology for measuring and managing project performance regarding scope, schedule, and cost. It provides a way to assess project health and performance by comparing actual progress against the project baseline.

These tools and techniques are valuable for maintaining control over project costs, identifying areas of concern, and taking corrective actions when necessary to ensure that the project remains on track and within budget.

Earned Value Management (EVM)

Earned Value Management (EVM) is a powerful technique in project management that allows you to measure and evaluate the real progress of a project based on the work performed, time spent, and costs incurred. It provides a valuable means of comparing the planned progress with the actual progress, allowing you to assess project performance and efficiency.

EVM includes several essential terms and calculations:

1. Earned Value (EV): EV is a measure of the value of the work completed at a specific point in time. It represents the estimated value of the work actually accomplished and is calculated based on scope, schedule, and cost. EV allows you to measure progress in the project.
2. Planned Value (PV): PV represents the planned value of work that should have been completed up to a certain date. It reflects the original project schedule and budget.
3. Actual Cost (AC): AC represents the actual cost incurred to date for the work performed.
4. Budget at Completion (BAC): BAC is the total budget allocated for the entire project from start to finish. It is a predetermined amount.
5. Estimate at Completion (EAC): EAC is an estimate of the total cost required to complete the project based on current performance and actual costs incurred. It can be calculated using various methods, such as EAC = AC + (BAC – EV).
6. Estimate to Complete (ETC): ETC is an estimate of the additional costs required to complete the project based on the current performance. It represents the projected cost to finish the remaining work.
7. Variance at Completion (VAC): VAC is the difference between the BAC and the EAC. It tells you whether you expect to be over or under budget at project completion.

The Earned Value Management (EVM) methodology provides several key performance indicators that help assess a project’s performance in terms of scope, schedule, and cost.

Let’s explore some important performance indicators used in EVM:

1. Number of Communications Channels: The formula to calculate the number of communications channels is n * (n-1) / 2. It helps evaluate the complexity of project communication based on the number of people involved in the project.

2. Schedule Performance Index (SPI):

   • SPI = EV / PV
   • If SPI is greater than 1, it indicates that the project is ahead of schedule.
   • If SPI is less than 1, it means that the project is behind schedule.
   • If SPI equals 1, it signifies that the project is on schedule as planned.

3. Cost Performance Index (CPI):

   • CPI = EV / AC
   • If CPI is greater than 1, it indicates that the project is under budget.
   • If CPI is less than 1, it suggests that the project is over budget.
   • If CPI equals 1, it means the project is on budget as planned.

4. Schedule Variance (SV):

   • SV = EV – PV
   • If SV is greater than 0, it means the project is ahead of schedule.
   • If SV is less than 0, it indicates that the project is behind schedule.
   • If SV equals 0, the project is on schedule as planned.

5. Cost Variance (CV):

   • CV = EV – AC
   • If CV is greater than 0, the project is under budget.
   • If CV is less than 0, the project is over budget.
   • If CV equals 0, the project is on budget.

These performance indicators are valuable tools for project managers to assess and communicate the progress and financial health of the project to stakeholders. By analyzing these metrics, project managers can make informed decisions and take corrective actions to keep the project on track.

These additional performance indicators and metrics in Earned Value Management (EVM) provide further insights into a project’s performance and forecasting:

1. To Complete Performance Index (TCPI):

   • TCPI = (BAC – EV) / (BAC – AC)
   • If TCPI is greater than 1, it indicates that the project will likely finish under the budgeted cost.
   • If TCPI is less than 1, it suggests that the project is expected to exceed the budgeted cost.
   • If TCPI equals 1, the project is expected to finish within the budgeted cost.

2. Estimate to Completion (ETC):

   • ETC = EAC – AC
   • ETC helps estimate the cost needed to complete the project. It considers the cost performance up to the current point in the project.

3. Variance at Completion (VAC):

   • VAC = BAC – EAC
   • VAC indicates the expected difference between the budgeted cost at completion (BAC) and the estimated cost at completion (EAC).
   • If VAC is greater than 0, it implies that the project is expected to finish under budget.
   • If VAC is less than 0, it implies that the project is expected to finish over budget.
   • If VAC equals 0, it suggests that the project is expected to finish right on budget.

4. PERT Estimation (PERT):

   • PERT Estimation is used to estimate project duration. It considers three estimates: optimistic (O), most likely (M), and pessimistic (P).
   • The formula for PERT Estimation is (O + 4M + P) / 6.

These indicators and estimation methods in EVM help project managers and stakeholders gain a comprehensive view of the project’s status, expected costs, and timelines. They assist in decision-making, risk assessment, and taking corrective actions as needed to ensure the project’s success.

In this example, you’ve calculated several key Earned Value Management (EVM) metrics for a project involving the construction of four walls.

Let’s summarize the results:

1. Planned Value (PV): The PV, which represents the planned value to date, is calculated as 100 * 3 = $300.
2. Earned Value (EV): The EV, representing the value of the work completed, is calculated as 100 (for Wall 1, 100%) + 75 (for Wall 2, 75%) + 25 (for Wall 3, 25%) + 100 (for Wall 4, 100%) = $200.
3. Actual Cost (AC): The AC, representing the actual cost to date, is given as $300.
4. Budget at Completion (BAC): The BAC, representing the budgeted cost for the entire project, is given as $400.

Now, let’s calculate the EVM metrics:

• Schedule Performance Index (SPI): SPI = EV / PV = 200 / 300 = 0.66
  • SPI indicates that for every $100 spent, only $66 worth of work has been completed. This suggests a delay in the project, making it over budget in terms of time.
• Cost Performance Index (CPI): CPI = EV / AC = 200 / 300 = 0.66
  • CPI indicates that for every $100 spent, only $66 worth of work has been accomplished. This implies a cost overrun, as it is over budget.
• Schedule Variance (SV): SV = EV – PV = 200 – 300 = -$100
  • SV shows that the project is behind schedule by $100, indicating a delay.
• Cost Variance (CV): CV = EV – AC = 200 – 300 = -$100
  • CV represents a cost overrun of $100, indicating that the project has exceeded the budget.
• To Complete Performance Index (TCPI): TCPI = (BAC – EV) / (BAC – AC) = (400 – 200) / (400 – 300) = 2
  • A TCPI greater than 1 implies that the project would require twice the original budget to complete it. This suggests a significant cost overrun.
• Estimate at Completion (EAC): EAC = AC + BAC – EV = 300 + 400 – 200 = $500
  • EAC represents the updated estimate to complete the project, indicating that it would cost $500 to finish the project.

In this scenario, the project is both behind schedule (with an SPI and SV less than 1) and over budget (with a CPI and CV less than 1). The TCPI exceeding 1 and the EAC being greater than the original BAC indicate that substantial corrective actions are needed to bring the project back on track.

Here’s a summary of the key takeaways:

1. EV (Earned Value) is used at the beginning of SPI, CPI, SV, and CV formulas.
2. If a formula is related to variance, EV is equivalent to something.
3. If a formula is related to an index, EV is divided by something.
4. Use AC (Actual Cost) for formulas related to cost.
5. Use PV (Planned Value) for formulas related to scheduling.
6. Interpret negative variance as bad and positive variance as good.
7. When interpreting the indices, values greater than 1 are good, and values less than 1 are bad.

These notes provide a handy reference for understanding and applying EVM concepts in project management. 

Author: Arash Beyazian Serkandi & Hamid Hosiennasab

Eizat Alhayat Project management Services

Consultation and Private Training in Organizational Management, Planning, and Control

Topic: What is Project cost management ?