Organization Cost Management according to the global standard

Cost Management plan

Table of Contents




Cost Management

Cost is the process required to estimate cost and budget during an activity. Project management includes planning, budgeting, and cost management of the organization’s activities. Cost management did not occur in isolation, meaning it required information and input from executive teams and key stakeholders.
Cost management should first be considered when planning the activities of the organization to create a framework for all cost management activities and thus ensure that it does not involve costs that are higher than the intended budget.
Many financial techniques such as ROI (Return on investment, Payback) and Cash Flow (cash flow)),Are used in this process.

This area of ​​knowledge in the Planning phase includes 3 processes and one feedback:

processe1. Cost Management  Plan
processe 2. Estimate Costs
processe 3. Determine Budget
feedbackthe Monitor & Control phase includes the Cost Control processes, which are described in full below. We deal with each case.

-Cost Management Plan

The cost planning process can set the framework, policies, and methods for how to evaluate and manage costs and explain all the details of how cost management processes are performed.
This planning is a complete description of how to plan, estimate and control project costs. The output of the Cost Cost Management Plan is the Cost Management Plan, which is part of the Management Plan. The main advantage of this process is that it provides good guidance on how to manage costs from the beginning to the end of the project. To plan for cost management, we need to know how to invest in a project.

Financing or investing in organizations

Financing or in other words, investment of the organization is done in 3 ways:

1. Self-funding: The organization invests separately
2. Funding with equity: Finds an investor
3. Funding with debt: Investments are made with loans or loans.

Cost Management Plan Items

Items that are specified in the cost management plan are:

1. Units of measure
2. Level of precision
3. Level of accuracy
4. Control thresholds
5. Reporting formats
6. Organizational procedures links (Organizational Procedures Link)
7. Rules of performance measurement
Perhaps you have ever wondered what is the difference between precision and accuracy?
Accuracy means repetition in doing the previous work, and accuracy is the correct performance of an action.

Cost Management Plan inputs, tools, techniques, and outputs

We now turn to the inputs, tools, techniques, and outputs of the cost management program:

-Inputs

1. Charter
2. Management plan

  • · Schedule management plan
  • · Risk management plan

3. Enterprise environmental factors
4. Business organizational assets

“Tools & Technique” Tools & Technique

1. Expert judgment
2. Data analysis
3. Meetings

 Outputs

1. Cost management plan

When planning to manage costs, we do two main things:

1. Life Cycle Costing:

In this cycle, in addition to the cost of activities, the cost of the product life cycle is also examined. It also examines how much the product will cost over its useful life.
2. Value Analysis:

When analyzing value, we look for alternative ways to reduce the cost of the work we do.
Note, however, that these alternatives should not affect performance and quality of work.
For example:

One of the companies supplying raw materials has a special discount for more purchases, in which case we buy the materials we need with the same original quality and at a lower price.

-Cost Estimate

Estimate Cost Estimate Cost is the process of creating an approximate monetary value for each activity.
The cost estimate predicts what the cost of completing the activities will be based on the information we now know.
The main advantage of this process is that it determines the amount of money needed to complete the project.
When estimating costs, it is important to know what the costs are.

Project Costs categories

Project costs are divided into 4 categories:

1. Direct Cost:

These costs are directly related to the work of the project.
The source of this type of cost is known and you know which activity is running. for example; Execution team trips, team members’ salaries, and…
2. Indirect Cost:

These are overhead costs or a series of additional costs that ultimately lead to the organization’s greater profit.
Office fees, secretary fees, taxes, product quality costs, and’s that cannot be said for any of the specific activities.
3. Fixed Cost:

Costs that do not change with increasing or changing the volume of work and product production. For example, office rent, equipment, and Cost.
4. Variable Cost:

Costs that are variable in proportion to the change in product volume or workload. For example, the cost of raw materials, resources, and wages

Note: When estimating costs, you need to know whether you only need direct costs or indirect costs.
To estimate the cost, we need to review the project schedule to determine what resources each activity needs.

Cost Estimation Inputs, tools and techniques, and outputs of :

Inputs

1. management plan

  • · Cost management plan
  • · Quality management plan
  • · Scope baseline

2. Organizational documents

  • · Lessons learned register
  • · Schedule
  • · Resource requirement
  • · Risk register (Risk list)

3. Enterprise environmental factors
4. Organizational process assets

“Tools & Technique” Tools & Technique

1. Expert judgment
2. Analogous estimating
3. Parametric estimating
4. Bottom-up estimating 5. Bottom-up estimating
5. Three-point estimating
6 Data analysis.

  • · Alternative analysis
  • · Reserve analysis
  • · Cost of quality

7. Management information system
8. Decision making

  • Voting
 Outputs

1. Cost estimates
2. Basis of estimates
3. Organization document updates

  • · Assumption log (assumptions)
  • · Lessons learned register (List of registered lessons learned)
  • · Risk register (list of risks)

 Types of estimates:

1. Analogous Estimating:

In this method, the activities performed are used to estimate reactivation.
This method is used when professionals have information about the organization.

This method is also called top-down estimating.

2. Parametric Estimating:

This method is called parametric or estimating meter.
For example, the installation of wallpaper is 50 $ per meter, so for 100 meters of the hall wall, its cost is estimated at 5 thousand dollars.

In this method, mathematical models or calculations are used to determine the cost of activities.

3. Bottom-up Estimating:

In this method, we act according to the available WBS structure. If the lowest level of ‌WBS is broken down to Activity, we start estimating the cost from the same Activities and move up. Do the same for WBS until the Work Package level is shredded.

Cost estimate Considerations

The titles that should be considered when estimating the cost are:

1. Contingency Reserves:

Contingency reserves are part of the budget set aside to deal with risks that may occur during the project.
2. Vendor Bid Analysis:

Sales representative analysis is one of the most accurate methods for estimating costs.
In this way, a tender can be held and in this way, the costs that will be incurred will be obtained from the sales representatives.
Therefore, if we deduct the profit from these costs, we could easily estimate the costs.
This analysis of eligible vendors, if there is a significant difference in cost estimates, could mean that the scope of activity is not well defined.
If third-party vendors are used, the manager must ensure that their estimated costs are included in the budget.
3. Activity cost estimate:

In this method, we use the information known to date to estimate the cost of activities.

cost estimate of activities activities

To support the cost estimate of activities, you should also pay attention to the following 5 items, which are considered as details:

  1. · Basis of estimation
  2. · Assumptions
  3. · Constraints
  4. · Range of possible estimates
  5. · Confidence level of the final estimate

Cost Estimate Methods

Costs can be estimated based on the following 3 methods:

1. Rough Order of Magnitude (ROM) Estimates:

This method is used when we do not have any information about the project.
The deviation range of this estimate is -25% to 75%, but this range can vary depending on the amount of information about the project when creating the estimates.
2. Budget estimate:

This type of estimate is typically done in the planning phase and deviates by -10% to 25% from reality.
3. Definitive estimate:

This type of estimate is very important and is used when we are in the project implementation phase and all estimates are real.
Some project managers consider +/- 5% and others -5% to 10% as the range of deviation from the estimate of reality.

-Determine Budget

Budgeting is the process of collecting unique activities or package costs in a project budget.
The main advantage of this process is that it determines the cost baseline based on the measurement of project performance.

Determine Budget, Inputs, tools and techniques, and the Output

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

Inputs

1. Project management plan

  • · Cost management plan
  • · Resource management plan
  • · Scope baseline

2. Project documents

  • · Basis of estimates
  • · Cost estimates
  • · Project schedule
  • · Risk register

3. Business documents

  • · Business case
  • · Benefits management plan

4. Agreements (agreement)
5. Enterprise environmental factors (business environmental factors)
6. Organizational process assets

Tools & Technique

1. Expert judgment
2. Cost aggregation
3. Data analysis

  • Reserve analysis

4. Historical information review
5. Funding limit reconciliation
6. Financing

 Outputs

1. Cost baseline
2. Project funding requirements
3. Project documents updates

  • · Cost estimates
  • · Project schedule
  • · Risk register
  • · Cost aggregation: In this method, to determine the budget from the last level of WBS, start collecting costs to reach the highest level.
  • .Funding limit reconciliation
  • .baseline Cost: Approved project budget based on approved time. The cost baseline lets you know how much money you need to spend at each point in time.
  • .Account Control: During the time you report to your key stakeholders, they may ask you for detailed information about the financial activities and less information about the cost of business packages. Project managers operate at the Account Account level and report as well as cover several work packages under their work portfolio.
  • .Reserve analysis: includes two parts–> management reserves and contingency reserves.
tip:
  • The baseline can be found by calculating the total costs of the Control Account.

Baseline = cost + contingency reserves

project budget = Baseline + management reserve

  • Note: that the investment in the project is not made by the employer all at once, but is gradual.
    Financial needs are obtained from the baseline fee.

-Cost Control

The control process is monitoring the actual cost of the project against the cost of the Baseline and managing changes in the Baseline. The main advantage of this process is that it allows the project manager to detect cost variance early in the project, so corrective actions can be taken to return the project to the budget.
To apply any changes to the project budget, the Perform Integrated Change Control process must first be studied and then a change request requested.

Cost Control inputs, tools and techniques, and the output

The inputs, tools and techniques, and the output of cost control are as follows:

Inputs

1. Project management plan

  • · Cost management plan
  • · Cost baseline
  • · Performance measurement baseline

2. Project documents

  • · Lessons learn register

3. Project funding requirement
4. Work performance data
5. Organizational process assets

“Tools & Technique” Tools & Technique

1. Expert judgment
2. Data analysis

  • · Earned value analysis
  • · Trend analysis
  • · Reserve analysis

3. To-complete performance index
4. Project management information system

 Outputs

1. Work performance information
2. Cost forecasts
3. Change request
4. Project management plan update

  • · Cost management plan
  • · Cost baseline
  • · Performance measurement baseline

5. Project documents update

  • · Assumption log (details)
  • · Basis of estimate
  • · Cost estimates
  • · Lessons learned register
  • · Risk register

Control Cost Components

The components of Control Cost are as follows:

1. Ensure timely execution of change requests.
2. If necessary, request changes related to the cost.
3. Cost performance monitoring is done and the root causes of variance are understood.
4. The cost of activities is monitored against the project budget.
5. Cost performance reports are provided to key stakeholders.
6. Ensures that costs do not exceed financial constraints.
7. Unauthorized changes to the budget are avoided.
8. Additional costs must be added to the project to the extent permitted.

Cost control Tools

Three tools can be used to control costs:

1. Variance analysis: Using this method, we can find the discrepancies between actual costs and budget costs (from the cost Baseline).
2. Return on investment (ROI): A technique for estimating the potential profitability of an investment.
3. Earned Value Management: This method is used to measure project performance against scope, timing, and Baseline costs are used.

Earned Value Management(EV)

It is one of the most basic costs control techniques and is a way to measure and evaluate the actual progress of a project based on work done, time spent, and costs. And shows us the percentage of progress achieved in the project. In other words, it represents the estimated value of the work that has been done. EV is extracted from all three Scope, Schedule, and Cost. (All three of these cases together, not alone)
This method can be used to compare the initial plan with what happened and evaluate the level of productivity.

Calculating Scope and Schedule

To calculate Scope and Schedule, we need to convert them to Cost.

Planned Value (PV ) indicates how much we have planned to receive the value earned to date?
Note that we only calculate the PV at the beginning of the project.
Actual cost (AC) Indicates what is the actual cost of the work done today?
Budget at completion (BAC) indicates how much budget is needed to complete the project? (This amount is predicted)
Estimate at completion (EAC) is the estimate of the cost at which the project will end.
Estimate to Complete  (ETC) is the amount of cost that can be considered from today until the end of the project to complete the project.
Variance at completion (VAC) is the expected amount, from today until the end of the project, which can be more or less than the specified budget.
Its value is calculated by the difference between what is planned and what is implemented.

Important indicators in calculating the value obtained

1. Number of communications channels:

In this way, according to the number of people involved in the work (n), the number of communications that must be managed during the work can be determined.

n * (n-1) / 2

2. Schedule performance index (SPI)

SPI = EV / PV

  • · If this index is greater than 1, it indicates that the project has been completed earlier than the initial schedule.
    If it has a value less than 1, it indicates that the work done is completed later than the initial estimate.
    If the value is exactly equal to 1, it means that the project has been executed according to the original schedule.

3. Cost performance index (CPI)

CPI = EV / AC

  • If this index is greater than 1, it indicates that the project is cheaper than the initial estimate.
    If this index is less than 1, it means that the project is more costly than the initial estimate.
    If it has a value equal to 1, it indicates that the project has been implemented by the initial planning.

4. Schedule variance (SV):

This indicator indicates the deviation of the project schedule from the initially estimated project schedule.

SV = EV-PV

  • If this index is greater than 0, it means the project is completed faster than the initial schedule.
    If this index is less than 0, it means that the project has been completed with a delay.
    If it has a value equal to 0, it means the completion of the project according to the planned schedule.

5. Cost variance (CV):

This indicator indicates the deviation of project costs from the initial estimated cost of the project.

CV = EV-AC

  • .If this index is greater than 0, it means the completion of the project at a cost less than the initial estimated cost.
  • · If this index is less than 0, it means the completion of the project with more costs than the initially estimated cost, in other words, the project is more expensive.
  • .If it has a value equal to 0, it means that the project has been completed exactly with the planned budget.

6. Complete Performance Index (TCPI)

(TCPI = (BAC – EV) / (BAC – AC

  • .If this index is greater than 1, it means that the project under the desired budget has been completed.
  • · If this index is less than 1, it means that the completion of the project has cost a lot and more than the intended budget has been spent.
  • · If the value is equal to 1, it means that the project has been completed according to the planned budget.

7. Estimate to Completion:

This way you can estimate the cost of completing the project.

ETC = EAC – AC

8. Variance at Completion (VAC)

VAC = BAC – EAC

  • .If this index is greater than 0, it means that the project has been completed at a lower cost and some of the designated budgets remain.
  • · If this index is less than 0, it means that more money has been spent to complete the project.
  • · If it has a value equal to 0, it means that the project has been completed according to the planned budget.

9. PERT Estimation (PERT):

This method is often used to estimate project time.

PERT Estimation = (O + 4M + P) / 6

O: Optimistic Estimate
M: Most Likely Estimate
P: Pessimistic Estimate

How to Calculate the EAC (project completion estimate)

Calculating the EAC (project completion estimate) according to the conditions, this index can be calculated from 4 formulas:

10. If the initial estimate for project completion has not been calculated correctly, the estimate has been made with incorrect data, assumptions or position have changed, then we re-estimate the ETC (project completion estimate) index:

EAC = AC + New ETC

11. If an error occurs and we encounter high costs (cost overrun) but to ensure that this does not happen again, then we use this formula:

EAC = AC + BAC – EV

This formula is the most popular PMI formula and it is recommended to use this formula if necessary unless proven otherwise.
It is in this context that the project manager commits to rectifying the situation.
Except in this case, in the other 3 cases where we calculate the EAC, the project manager has been fired.
12. If the CPI (Project Cost Performance Index) is not accurate, we will continue to work regardless of its inaccuracy and this indicator will remain unchanged until the end of the project:

EAC = BAC / CPI

15. This index is used when the questionnaire gives you all the values ​​(AC, BAC, EV, CPI, SPI):

EAC = AC + (BAC – EV) / (CPI * SPI)

Example:

Company A undertakes the construction of 4 walls. The cost of building each wall is $ 100.
And we have 1 day to build each wall. I am currently on day 3 of the project and we have spent $ 300. The percentage of completion of each wall is a first wall 100%, second wall 75%, and the third wall 25%.
It is desirable to calculate: SPI, CPI, SV, CV and TCPI.

PV = 100 * 3 = $ 300

EV = 100 * 75% + 100 * 25% + 100 * 100% = $ 200

AC = $ 300

The budget required to complete the project is $ 400. BAC = $ 400

SPI = EV / PV = 200/300 = 0.66

This means that for every $ 100 spent, there is a value of $ 66.
In other words, $ 34 has been added for each wall, which is why it is over budget.
(Since SPI is an indicator of project time performance, we converted it to cost, but it can be said that for every 100 minutes of considered time, it only has a useful output of 66 minutes)

CPI = EV / AC = 200/300 = 0.66

So far $ 100 has been overcharged. SV = EV – PV = 200 – 300 = -100
We have a shortage of $ 100 so far. CV = 200 – 300 = -100

TCPI = 400 – 200/400 – 300 = 2

Since this value is more than 1, it means that we have spent 2 times more than a certain budget (over budget)
Note that if in real conditions the TCPI value is more than 1.1, the project manager will be fired,
if The project manager should commit not to repeat these conditions in this case:
EAC = AC + BAC – EV = 300 + 400 – 200 = 500
We need $ 500 to complete the project.

Things to keep in mind

1. At the beginning of the formulas SPI, CPI, SV, CV, EV are used.
2. If the formula is related to variance, the EV formula is equivalent to something.
3. If the formula is for an index, EV is divided by something.
4. If the formula is for cost, use AC.
5. Use PV if the formula is for scheduling.
6. To interpret variance, a negative value is good and a positive value is good.
7. To interpret the indices, values ​​greater than 1 are good, and values ​​less than 1 are bad.

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Professor Siavosh Kaviani was born in 1961 in Tehran. He had a professorship. He holds a Ph.D. in Software Engineering from the QL University of Software Development Methodology and an honorary Ph.D. from the University of Chelsea.

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