Sunday, December 18, 2011

Points in Cost Management

Cost of Quality: Cost that is incurred to achieve required quality.
Stranded/Sunk Costs: costs uncured that cannot be reversed irrespective to future events.
Value Engineering/ Analysis: Doing the same work for less. E.g. outsourcing
Marginal analysis: Spend time on improvement if it improves revenues or productivity.
Determine Budget (Cost Performance Baseline): The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.
Budget, is time-phased (WHAT costs will be incurred and WHEN they will be incurred).
The Cost Baseline describes a detailed budget that shows costs and timelines for each work package or activity. It is performed after Define Activities, Estimate Activity Resources, Estimate Activity Durations, Develop Schedule and Estimate Costs. Larger projects may be divided into multiple Cost Baselines.

Control Costs:
The process of monitoring the status of the project to update the project budget and managing changes to the cost baseline.

Cumulative CPI: The rate at which the project performance is meeting cost expectations from the beginning up to a point in time. Also used to forecast project’s cost at completion.

CPIC (CPI Cumulative)= EVC (EV Cumulative)/ ACC (AC Cumulative) = Which calculates the project's performance up to a point in time.

To-Complete Performance Index (TCPI): performance needed in order to achieve earned value targets (either financial or schedule).

TCPI (Based on BAC) = Work Remaining i.e, (BAC-EV) / Remaining Funds i.e., (BAC-AC) (lower than 1 is good)

TCPI (Based on EAC) = Work Remaining i.e, (BAC-EV) / Remaining Funds i.e., (EAC-AC) (lower than 1 is good)
TCPI calculation is based on a specified management goal. If the cumulative CPI falls below the baseline plan, all future work of the project will need to immediately be performed in the range of the TCPI (BAC) to stay within the authorized BAC. Once management acknowledges that the BAC is no longer attainable, the PM will prepare a new EAC for the work, and one approved the project will work to the new EAC value and it supersedes the BAC.

The EVM method works well in conjunction with manual forecasts of the required EAC costs. The most common EAC forecasting approach is a MANUAL, BOTTOM-UP SUMMATION by the PM and Project Team.

Project Manager monitors EV, both incrementally to determine CURRENT STATUS and cumulatively to determine long-term PERFORMANCE TRENDS.

Project Cost Baseline = Project Estimates + (Cost) Contingency Reserves

Project Cost Budget = Project Cost Baseline +Managementreserves

Life Cycle Costing includes Acquisition, Operation, Maintenance, and Disposal costs.

Project Cost Control includes:
• Influencing the factors that create changes to the authorized cost baseline.
• Ensuring that all change requests are acted on in a timely manner.
• Managing the actual changes when and as they occur.
• Ensuring that cost expenditures do not exceed the authorized funding, by period and in total for the project.
• Monitoring cost performance to isolate and understand variances from the approved cost baseline.
• Monitoring work performance against funds expended,
• Preventing unapproved changes from being included in the reported cost or resource usage.
• Informing appropriate stakeholders of all approved changes and associated cost.
• Acting to bring expected cost overruns within acceptable limits.

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