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Cost management
Data collection & cost estimation
Cost accounting
Cost controll
Common Sources of Project Cost
Labor
Materials
Subcontractors
Equipment & facilities
Travel
…
Types of Costs
Direct Vs. Indirect
Direct: clearly assigned
Indirect: overhead, administration, marketing
Recurring Vs. Nonrecurring
Fixed Vs. Variable
Normal Vs. Expedited
Developing direct labor cost
Total direct labor cost =
= (hourly rate) x (hours needed) x (overhead charge) x (personal time)
Cost Classifications
Cost estimation
Clear definition of project costs at the beginning decreases the possibility of estimation errors.
With greater initial accuracy the likelihood of completing within budget estimates is greater.
To be able to create good estimations the project must be broken down by deliverables, work packages and tasks.
Cost Estimation Methods
Ballpark (order of magnitude) ±30%: preliminary
Comparative ±15%: historical data, parameter estimation
Feasibility ±10%: real data, after planning
Definitive ±5%: after design, known prices
Learning Curves
Learning curve theory states that as the quantity of items produced doubles, costs decrease at a predictable rate. The unit curve:
Problems with Cost Estimation
Low initial estimates
Unexpected technical difficulties
Lack of definition
Specification changes
External factors
Budgeting
Creating a Project Budget
Activity-Based Costing
Budget Contingencies
The allocation of extra funds to cover uncertainties and improve the chance of finishing on time.
Contingencies are needed because
Project scope may change
Murphy’s Law is present
Cost estimation must anticipate interaction costs
Normal conditions are rarely encountered
Planned and actual costs
Examples
3+1 alternative sources of a positive variance
3 alternative sources of a negative variance
Example
There is a project with three activites planned for a year
‘a’ with a planned cost of 1000,
‘b’ with a planned cost of 500 and
‘c’ with a planned cost of 1500.
‘a’ activity turned out to be more expensive (with an additional 200).
‘b’ was done as budgeted.
‘c’ is not finished in the year, and only 1000 was spent on it.
An additional ‘d’ activity was needed and performed with a cost of 300.
What is the cost variance for the given year?
What is the conclusion on the cost performance?
How to find out the true reason?
Cost & schedule variances
For any instant we can calculate:
BCWS: budgeted cost of work scheduled
BCWP: budgeted cost of work performed
ACWP: actual cost of work performed
From these, two variances can be derived:
Schedule variance in cost terms = BCWP – BCWS
Cost variance = BCWP – ACWP
Cost & schedule variances
Example
Progress report
Progress report
Calculate the variances for day 6
Forecasting and comparison of projects
Solution
Problem solving
Problem solving
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