Project Cost Management

7.1 Plan Cost Management
Plan Cost Management is the process that establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs. The key benefit of this process is that it provides guidance and direction on how the project costs will be managed throughout the project.
Project Cost Management is primarily concerned with the cost of the resources needed to complete project activities. Project Cost Management should also consider the effect of project decisions on the subsequent recurring cost of using, maintaining, and supporting the product, service, or result of the project.
Predicting and analyzing the prospective financial performance is optional in Project Cost Management.
Scope baseline and Schedule baseline which exist in Project Management Plan is mandatory for cost management plan (Input).

Cost Management Plan
The cost management plan is a component of the project management plan and describes how the project costs will be planned, structured, and controlled. The cost management processes and their associated tools and techniques are documented in the cost management plan. the cost management plan can establish the following:
  • Units of measure - how much for man days, how many software license have to buy etc.
  • Level of precision - The degree to which activity cost estimates will be rounded up or down
  • Level of accuracy -The acceptable range (e.g., ±10%) used in determining realistic activity cost estimates is specified, and may include an amount for contingencies
  • Organizational Procedures Links - The work breakdown structure (WBS) provides the framework for the cost management plan, allowing for consistency with the estimates, budgets, and control of costs. The WBS component used for the project cost accounting is called the control account. Each control account is assigned a unique code or account number(s) that links directly to the performing organization's accounting system.
  • Control Thresholds - Variance thresholds for monitoring cost performance may be specified to indicate an agreed-upon amount of variation to be allowed before some action needs to be taken. Thresholds are typically expressed as percentage deviations from the baseline plan.
  • Rules of Performance Measurement - rules of performance measurement.Earned value management (EVM) rules of performance measurement are set.

7.2 Estimate Costs
Cost tradeoffs and risks should be considered, such as make versus buy, buy versus lease, and the sharing of resources in order to achieve optimal costs for the project.
Cost estimates should be reviewed and refined. 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%.

Enterprise Environmental Factors (Input)
  • Market conditions - These conditions describe what products, services, and results are available in the market, from whom, and under what terms and conditions. Regional and/or global supply and demand conditions greatly influence resource costs.
  • Published commercial information - A Internal database contain information. Resource cost rate information is often available that track skills and human resource costs, and provide standard costs for material and equipment. Published seller price lists are another source of information. e.g. Hiring a programmer and know the salary range.

Analogous Estimating (TT)
Analogous cost estimating uses the values such as scope, cost, budget, and duration or measures of scale such as size, weight, and complexity from a previous, similar project as the basis for estimating the same parameter or measurement for a current project. This technique relies on the actual cost of previous, similar projects as the basis for estimating the cost of the current project. It is a gross value estimating approach, sometimes adjusted for known differences in project complexity. Analogous cost estimating is frequently used to estimate a value when there is a limited amount of detailed information about the project, for example, in the early phases of a project. Analogous cost estimating uses historical information and expert judgment.

Parametric Estimating (TT) Parametric estimating uses a statistical relationship between relevant historical data and other variables (e.g., square footage in construction) to calculate a cost estimate for project work. This technique can produce higher levels of accuracy.

Bottom-up Estimating (TT) Bottom-up estimating is a method of estimating a component of work.

Three-Point Estimating (TT) The calculation same as Project Time Management.
  • Most likely(tM)最可能值
  • Optimistic(tO)樂觀值
  • Pessimistic(tP)悲觀值
  • Triangular distribution. tE = (tO + tM + tP)/ 3 (or P+M+O/3 easy to memorize)
  • Beta distribution(from the traditional PERT technique). tE = (tO + 4tM + tP)/ 6 = (O+4M+P)/6
  • Standard Deviation (標準偏差) - (Pessimistic - Optimistic) / 6

Reserve Analysis (TT)
Cost estimates may include contingency reserves (可能性的預留) (sometimes called contingency allowances (額外補貼) ) to account for cost uncertainty. Contingency reserves are the budget within the cost baseline that is allocated for identified risks, which are accepted and for which contingent (偶然的事情) or mitigating (緩和) responses are developed. Contingency reserves are often viewed as the part of the budget intended to address the “known-unknowns” that can affect a project.

Basis of Estimates (Output)
Provide a clear and complete understanding of how the cost estimate was derived. Supporting detail for activity cost estimates may include:
  • Documentation of the basis of the estimate (i.e., how it was developed),
  • Documentation of all assumptions made,
  • Documentation of any known constraints,
  • Indication of the range of possible estimates (e.g., €10,000 (±10%) to indicate that the item is expected to cost between a range of values), and
  • Indication of the confidence level of the final estimate.

7.2 Estimate Costs
Cost Aggregation (TT)
Cost estimates are aggregated by work packages in accordance with the WBS. The work package cost estimates are then aggregated for the higher component levels of the WBS (such as control accounts) and ultimately for the entire project.



7.3.3 Determine Budget: Outputs
Cost Baseline
The cost baseline is the approved version of the time-phased project budget, excluding any management reserves, which can only be changed through formal change control procedures and is used as a basis for comparison to actual results.


7.4 Control Costs
Earned Value Management
See: http://justpmp.blogspot.com/p/earned-value-management.html
You can expect five to ten questions related to Earned Value Management. These are generally pretty simple once you have good understanding of the concepts, and remember the formulae. These formulae are explained below.

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