Information System Project Manager Examination Paper Writing Review Notes (5) - Overview of Cost Management

project cost management

theoretical basis

1. Project Cost Management Overview
   
   • Project cost management is to manage and control all required processes during the entire project implementation process to ensure that the project is completed on schedule with the highest possible quality and quantity under the approved budget.
   • The main objective is to ensure that the various processes required for the project are completed within the approved budget, with project cost being a key consideration.
   • Project cost includes the sum of various expenses consumed in the whole process of the project, including decision-making cost, bidding cost, and implementation cost. The implementation cost is the most important component.
   • Implementation costs include the following components
     
     • direct cost. The cost of direct provenance can be found directly from the project.
     • s. Refers to the cost of expenses that cannot be directly included in the cost of each product. such as utility bills.
     • fixed cost. Refers to non-repetitive costs that do not change with changes in production volume, workload or time, such as expert guidance hours.
     • Variable costs. Refers to costs as a function of production volume, effort, or time.
     • Controllable costs. Refers to costs that the project manager can directly control.
     • Uncontrollable costs. Refers to costs that the project manager cannot directly control.
     • opportunity cost. Refers to the choice of one project and must give up another project, the benefit that another project can bring is the opportunity cost of the selected project.
     • Sunk costs. Refers to any cost that has been spent, regardless of whether it is reasonable or not. Do not consider this part of the cost when deciding whether to proceed with the project.
     • Unforeseen expenses. Also known as a risk reserve, it refers to the expense used to deal with possible negative risks. The schedule of the project should also take into account certain attachments and reserve a certain amount of time.
     • working capital. Refers to all funds available to the project itself.
     • The law of diminishing returns. It means that with the increase of input, the output per unit of input will show a trend of gradually decreasing.
     • Marginal analysis. Refers to the unit output that can be brought about by the analysis of unit income.
     • depreciation. Refers to the gradual wear and tear of fixed assets over time.
   • The cost management process is as follows
     
     • Cost Estimation Process. The cost budgeting process is an important, critical and sensitive part of the project plan, which is to estimate and plan the cost required to complete the project.
     • Cost budgeting process. The cost budgeting process allocates the estimated total cost to the various work items of the project and establishes a cost baseline plan to measure project performance.
     • cost control process. The cost control process ensures that each work is carried out within the respective budget.
   • The most common way to estimate costs is to refer to historical standards, but in practice this is highly unreliable.
   • Commonly used tools and methods for estimating costs include top-down estimating, bottom-up estimating, determining resource rates, and project management software.
   • Project managers need to focus on cost estimation and control.
   • Cost control work includes the following
     
     • Identify the factors that may cause changes in the project cost baseline plan, and exert influence on these factors to ensure that the changes develop in a favorable direction.
     • Take the work package as a unit, supervise the implementation of the cost, find the deviation between the actual cost and the budgeted cost, find out the reasons for the deviation, and do a good job in the analysis and evaluation of the actual cost.
     • Manage the work packages with cost deviations, take corrective measures in a targeted manner, and make appropriate adjustments and modifications to the project cost baseline plan if necessary according to the actual situation, and at the same time ensure that all relevant changes are accurately recorded in the cost baseline plan middle.
     • Notify project stakeholders of approved cost changes and adjusted cost baseline plans.
     • Expenses incurred to prevent incorrect, inappropriate or unauthorized project changes are included in the project cost budget.
     • While carrying out cost control, it should be closely integrated with project scope change, schedule change, quality control, etc., to prevent problems in project scope, schedule and quality caused by simple cost control, and even unacceptable risks.
2. Earned Value Analysis
   
   • Earned value analysis is a project performance measurement method, mainly used for performance measurement of actual costs. The basic idea is to judge the project cost and schedule implementation by measuring and calculating the deviation between the budgeted cost and the actual cost of the completed work, so as to help the project manager analyze the degree of completion of the ongoing project and measure the progress of the project. The cost efficiency of the project provides the basis for the selection of cost control measures. At the same time, it can predict and judge the development trend of project cost, and propose corresponding countermeasures.
   • basic concept
     
     • Planned Value (PV). Refers to the value of the work planned to be completed at a certain stage in the project implementation process, and is the budget value of the work planned to be completed. Calculation formula: planned value = planned workload * budget unit price
     • Actual Cost (AC). Refers to the cost actually spent at a certain stage in the project implementation process, and is the actual cost of the work that has actually been completed. Calculation formula: Actual cost = Actual amount of work completed * Actual unit price
     • Earned Value (EV). Refers to the budget value of the work that has actually been completed at a certain stage in the project implementation process, and is the budget value of the actually completed work. Calculation formula: earned value = actual work done * budget unit price
     • Budget at Completion (BAC). Refers to the cost basis of the entire project, and the completion budget generally does not change.
     • Total Budgeted Cost (TBC). How much does it cost to complete a project in total.
     • Cumulative Budgeted Cost (CBC). The sum of the costs that a project should cost at a particular point in time according to its budget.
     • Accumulated Actual Cost (CAC). The sum of the costs that have actually been spent on a project at a particular point in time.
     • Cumulative Realized Value (CEV). The value of all completed work products on a project at a particular point in time.
   • The four important parameters of earned value analysis are cost variance (CV), schedule variance (SV), cost performance index (CPI) and schedule performance indicator (SPI).
     
     • Cost variance (CV). Formula: CV=CEV-CAC.
       
       • A positive CV indicates that the project has a balance or is highly efficient.
       • A CV of zero means the budget is correct
       • A negative CV indicates that the project is overrun
     • Progress Variation (SV). Formula: SV=CEV-CBC
       
       • SV is positive, indicating that progress is advanced
       • SV is zero, indicating that the progress is consistent
       • SV is negative, indicating a lag in progress
     • Cost Performance Indicator (CPI). Formula: CPI=EV/AC
       
       • It represents the value that can be produced by the unit cost of the input
       • CPI>1 means below budget
       • CPI=1, indicating that the actual and the budget are consistent
       • CPI<1, means over budget
     • Progress Execution Indicator (SPI). Formula: SPI=EV/PV
       
       • It represents the ratio of the amount of work currently done to the amount of work that is expected to be done
       • SPI>1, the progress is advanced
       • SPI=1, the progress is consistent
       • SPI<1, progress is delayed
   • In addition to performing performance analysis of the project, forecasting calculations of estimated cost at completion (FCAC) can also be performed. There are three ways
     
     • FCAC=TBC/CPI, which represents the cost at completion if the project continues to operate at the current cost performance level.
     • FCAC=CAC+(TBC-CEV), indicating the cost of completion if the remaining part of the project can be completed according to budget.
     • FCAC = CAC + Reassessment of the remaining project budget, which actually requires a full reassessment of the budget.
   • Cost control starts with planning a plan to spend money CBC. CAC and CEV are then accounted for regularly. Understand project status by analyzing variances and performance indicators, then predict costs and take action to ensure costs are moving in a favorable direction.
   • When determining the adjustment objects, priority should be given to work packages with large cost deviation, poor cost performance and high cost, and adjustments should be made from the work tasks that started recently. Corrective actions include using qualified but lower cost labor or materials, sending experienced people to guide the work, reducing the scope of work or reducing the schedule, quality, etc. There is no set rule, and specific problems need to be analyzed in detail.
3. Project Cost Management Body of Knowledge

Table 3.4 Project Cost Management Body of Knowledge

enter	tools and techniques	output
Cost Estimate	Project Charter Project Scope Statement Project Management Plan WBS and WBS Dictionary Schedule Management Plan Employee Management Plan Risk Events Environmental and Organizational Factors Organizational Process Assets	Top-Down Cost Estimation Resource Unit Price Method Bottom-Up Cost Estimation Utilizing Computer Tools Other Estimation Methods Estimated Quality Costs of Contingencies
cost budget	Project Cost Estimation Work Breakdown Structure Project Schedule Project Charter Project Management Plan Risk Management Plan	The rationality principle of expenditure in the total cost management reserve parameter model
Cost Control	Cost Performance Report Approved Change Request Cost Baseline Program Project Funding Requirements	Cost Change Control System Performance Measurement Project Performance Evaluation Computer Tool Deviation Management