Cost Management In Project Management Advantages

Both the cost and accuracy of parametric models vary widely. They are most likely to be reliable when the historical information used to develop the model was accurate, the parameters used in the model are readily quantifiable, and the model is scalable (i.e., it works as well for a very large project as for a very small one).

An analogous estimate is one that is arrived at by taking a project or part of a project that is already completed and adjusting the cost on the basis of size.

A bottom-up estimate is a detailed estimate taking into consideration a number of small estimates and summarizing them to a total for the project or subproject being estimated. A top-down estimate is usually a less accurate method that estimates the cost of the entire project by means of parametric, analogous, or some other estimating method.

The management reserve is money that is set aside for dealing with unknown risks. These unknown risks cannot be specifically identified. The risks mentioned in the question are identified and therefore no money should be put into the management reserve for them.

The contingency reserve is money that is set aside for dealing with known risks. These known risks can be specifically identified. The risks mentioned in the question are identified and therefore money should be put into the contingency reserve for them. It would not make sense to budget for the impact of every risk, since all risks have a probability associated with them that means that there is some chance that the impact will not occur; therefore, the expected value should be used.

The cost baseline is the time-phased budget for the project. It is usually shown as the PV curve on the earned value report and is usually shown as a cumulative value of the project budget over time. It will usually have a characteristic "S" shape to it. The contingency reserve and the management reserve are added to the project budget and baseline when and if they are needed to resolve risks that have actually taken place.

Life cycle costs are those associated with the project during the entire life of the project. These costs affect the way we think of the project since a poorly done project may finish below its intended budget but result in long-term warranty and repair costs that are greater than the money saved.

The project budget should be increased by $10,000 because the only work actually approved at this time is the change notice for the work to be done. If the work done must be undone at a later time and additional work is required to do it, another change notice must be approved and funding added to the project budget.

Anything that is done to help bring the project closer to its project plan is called corrective action. Updating the budget and revising the cost estimate are possible corrective actions. Contingency planning is not used to adjust project performance; it is used to budget money for known risks that may occur.

The only reason for changing the project's budget is a change in the project budget baseline. This can be brought about by the customer authorizing an addition to the scope of the project.

The project is completed when all of the work is done. The EV represents the work that is completed. The BAC represents the total of the work that is planned to be done. When the EV equals the BAC, all of the work must be done.

The project's spending plan is the plan for the flow of money to pay for the project.

The sum of the years' digits calculation for depreciation is done by summing the digits of each of the years of the useful life, 1+2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 = 55. The digits are reversed and divided by the total to get the percent of the value to be taken that year. In the third year it would be 8/55 = .145. The value is the equipment minus the scrap value, or $450,000. So we have .145 X $450,000 = $65,250.

The calculation for the present value is done by consecutively taking the appropriate factor from the table and multiplying it by the money flowing for the year. In this example $1,300 X .893 + $1,300 X .797 + $1,300 X .712, since there is a $1,300 payment each year.

Life cycle costing is a way of including the cost of the project even after delivery to the customer. Many projects have warranty repairs, support, and other costs that add to the cost of the project.

The cost performance index is calculated by dividing the EV by AC. CPI = .7 /.9 = .777.

The schedule performance index is obtained by dividing the earned value by the planned value. SPI = EV / PV; SPI = 6,000 / 5,000 = 1.200.

The BAC or the budget at completion is the sum of the expenditures that are currently planned for the project. It is the sum of the EV for each task in the project and will not change from week to week unless the budget for any task is changed.

When it is found that work that had been previously credited with its earned value and then later it is found that the value of the completed work was not completely delivered, the earned value should be reversed from the total earned value. In this case, since the amount of undelivered work was identified, only that amount was reversed. If the value missing was not identified but the work was shown to be incomplete, the entire earned value of the work would be reversed. When the work is finally completed, the earned value is credited to the earned value column again.

The cost variance is the earned value minus the actual cost. CV = EV — AC; CV = 7,000 - 9,000 = —2,000.

The schedule variance is the earned value minus the planned value. SV = EV — PV; SV = 2,500 — 3,000 = —500.

The EAC is calculated by dividing the BAC by the CPI for the week being calculated. It is the estimated cost of the project that is expected at the end of the project based on what we know about cost performance today. EAC = BAC / CPI; EAC = 20,000 / .7777 = 25,740.

The assumption in calculating the EAC by dividing the BAC by the CPI is that the CPI will stay the same for the remaining part of the project. The BAC may or may not be different by the end of the project but has nothing to do with the CPI and the EAC calculation. The BAC will change only if the budget is changed, and this happens only if new work is added to or taken from the project baseline. The schedule performance index has nothing to do with the EAC calculation.

The estimate to complete is calculated by EAC — EV. It is the difference between the work completed, EV, and the estimate of the project at the end of the project. Since the EAC and the EV are not choices, we need to look further. The EAC is BAC / CPI. The CPI, EV, and the BAC are not offered either. The CPI is EV / AC. Therefore, the three factors needed are the BAC, EV, and AC.

The EV should be reduced by the amount of the $4,000 already credited to the earned value report for planting the trees. The AC should not be reduced, and since there is no increase in budget the PV will not be changed. When the vendor installs the new trees, the $4,000 will be added to the EV once again.

In learning curve theory, each time a task is done the amount of time and cost involved in doing the task decreases. For each doubling of the number of units produced, the cost of producing the units decreases by a fixed percentage.

According to learning curve theory, the cost of a unit of production, the software module, will decrease by a fixed percentage for each doubling of the units produced. Since from unit 1 to unit 2 there was a 10% change in cost, the fixed percentage of reduction in cost was 90%. For unit 4, cost would be 81 person-hours, 90% of 90 person-hours. For unit 8, it would be 90% of 81, or 73 person-hours.

Listings of activities are usually not part of an analogous estimate. In analogous estimates large portions of the project are estimated by comparing and scaling similar parts of other projects.

The cost baseline is not available when the budget is created, since it is the result of taking the completed budget and allocating it over the time of the project. The project budget can be calculated without being time phased, but the cost baseline must be time phased.

The programmer will be paid for twenty-six weeks of work. The productivity and utilization factors affect the amount of time that someone is paid in comparison to the hours of effort required to complete the work. In this case the utilization and productivity are not required to calculate the cost: 26 weeks X 40 hours per week X $50 per hour X 1.3 fringe benefits X 1.5 overhead = $101,400.

To calculate the cost of 100 hours of effort we must adjust for the person's utilization and productivity. People of lower productivity take longer to do work and make more mistakes but usually cost less since they are usually younger and less experienced. This can often be economical. The calculation is 100 hours / .72 / .8 X $50 per hour X 1.3 fringe benefit X 1.5 overhead.

Including a contingency budget will set aside money for known, identified risks. This will give more control to the project and reduce the problem of known risks using budget that was set aside for the work of the project and causing a cost overrun in the project.

The actual payback period is between two years and three years. It is the point where the net or cumulative cash flows equal zero. This occurs between year 2 and 3 and is 2 and 29/30 of a year from the first cash flow. Cumulative cash flow in years are: 1, —500,000; 2, -290,000; 3, +10,000.

The net cash flow is the total of all the cash flows in and out of the company caused by the project. In this example there was a flow of $850,000 in and $900,000 out for a negative $50,000.

Calculating the net present value of the cash flows for the project involves adjusting the future cash flows to allow for diminishing value due to the time that we must wait to get them. Money received today is more valuable to us than money that will be received in the future.

Most of the project money will be spent during the execution phase. At the beginning of execution the rate of expenditures rises as people and materials are brought into the project. Later the expenditures peak and slow down.

The percent complete is the work completed, or the earned value divided by the total work to be done. EV / BAC = percent complete; PC = 24/ 97 = 25%.

Sum of the years' digits is an accelerated depreciation method. Each year of the useful life of the asset is given a sequential number; the numbers are summed and used as the denominator for a fraction of the asset's book value to be taken each year as depreciation. The numerator of the fraction for each year is the reverse of the years' sequence numbers.

First year use 10/55; second year use 9/55, and so on.

The breakeven point is the point where the sum of the investment and the unit cost times the number of units is the same.

Breakeven between $75,000 investment and keeping the existing machine: 75,000 + 2x = 5x; x = 25,000 units

Breakeven between $50,000 investment and keeping the existing machine: 50,000 + 3x = 5x; x = 25,000 units

Breakeven between $75,000 investment and the $50,000 machine: 75,000 + 2x = 50,000 + 3x; x = 25,000 units

If production were expected to continue for three years, this would mean the production of another 36,000 units. This is beyond the breakeven point for the most expensive machine, the one representing the $75,000 investment. Beyond the 25,000th unit this is the preferred machine to buy.

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