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MindMap Gallery Cost management knowledge map

Cost management knowledge map

The picture below shows the information system project manager (third edition) PMBOK (fifth edition) examination materials. Cost management refers to the general term for a series of scientific management behaviors such as cost accounting, cost analysis, cost decision-making and cost control in the production and operation process of an enterprise. Cost management consists of four components: cost planning, cost calculation, cost control and performance evaluation.

Edited at 2020-10-09 10:24:32

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Outline

Chapter 7 Cost Management

Overview

1. Project cost management is to ensure that the project is completed within the approved budget.

2. Type of cost.

(1) Variable costs: Costs that change with production volume, workload, or time are variable costs. Variable costs are also called variable costs.

(2) Fixed costs: Non-recurring costs that do not change with changes in production volume, workload, or time are fixed costs.

(3) Direct costs: Costs that are directly attributable to project work are direct costs. Such as project team travel expenses, wages, materials and equipment usage fees used in the project, etc.

(4) Indirect costs: The expenses allocated to this project from the general administrative expense account or the project costs shared by several projects form the indirect costs of the project, such as taxes, additional benefits, and security costs.

(5) Opportunity cost: When a certain amount of time or resources is used to produce a commodity, the lost opportunity to use these resources to produce other best substitutes is the opportunity cost, which generally refers to one of the biggest losses after making a choice.

(6) Sunk costs: It refers to the cost that cannot be changed by any decision now or in the future because a decision has been made in the past. Sunk cost is a historical cost and is an uncontrollable cost for existing decisions. It will greatly affect people's behavior and decision-making. The interference of sunk cost should be eliminated when making investment decisions.

3. Contingency reserves and management reserves.

(1) The contingency reserve is a portion of the budget included in the cost baseline to deal with identified risks that have been accepted and for which contingency or mitigation measures have been developed. A contingency reserve is usually a portion of the budget that is used to deal with known-unknown risks that may affect the project. For example, you can predict that some project deliverables will need to be reworked, but you don’t know how much rework will be required, and you can set aside a contingency reserve to deal with these unknown amounts of rework. No senior management approval is required before use.

(2) Management reserve is a project budget specially set aside for management control purposes to deal with unforeseen work within the project scope. Management reserves are used to address “unknown-to-unknown” risks that may affect the project. Management reserves are not included in the cost baseline but are part of the overall project budget and funding requirements and require senior management approval before use. When management reserves are used to fund unforeseen work, the used management reserves are added to the cost baseline, thereby causing the cost baseline to change.

4. The cost baseline is an approved time-based cost expenditure plan that reflects approved project cost changes (increase or decrease in funds) at any time and is used to measure and monitor the actual execution costs of the project. The cost baseline is the sum of the approved budgets for different schedule activities.

5. Main steps in project cost estimation. There are three main steps required to prepare a project cost estimate:

(1) Identify and analyze the component accounts of costs.

(2) Based on the identified project cost components, estimate the cost of each account.

(3) Analyze the cost estimation results, find out various costs that can replace each other, and coordinate the proportional relationship between various costs.

project cost management process

20. Planning cost management

enter

1. Project management plan (scope baseline, schedule baseline, other information)

2. Project Charter

3. Business environment factors

4. Organizational process assets

Tools and Techniques

1.Meeting (4)

2. Expert judgment (1)

3.Analytical techniques

output

cost management plan

21. Estimate costs

enter

1. Cost management plan

2. Human resources management plan

3. Scope benchmark

4.Project schedule plan

5. Risk Register

6. Business environment factors

7. Organizational process assets

Tools and Techniques

1. Expert judgment (1)

2. Analogous estimation

3. Parameter estimation

4. Bottom-up estimation

5. Three-point estimate

6. Reserve analysis (contingency reserve, management reserve)

7.Quality cost

8. Project management software

9. Seller’s bid analysis

10. Group decision-making techniques (brainstorming, Delphi method, nominal group technique)

output

1. Activity cost estimation

2. Basis for estimation

3. Project document updates (risk register)

22. Make a budget

enter

1. Cost management plan

2. Range baseline

3. Activity cost estimation

4. Basis for estimation

5. Project schedule

6. Resource Calendar

7. Risk Register

8. Agreement (cost of purchased products, services or results and only agreement information)

9. Organizational process assets

Tools and Techniques

1. Cost summary

2. Reserve analysis

3. Historical relationship

4. Funding Constraint Balancing (balancing funding expenditures against any restrictions on project funding)

output

1. Cost basis

2. Project funding requirements

3. Project document updates (risk register, activity cost estimates, project schedule)

23. Control costs

enter

1. Project management plan (cost baseline, cost management plan)

2. Project funding requirements (expenditure, estimated debt)

3. Work performance data (data on project progress)

4. Organizational process assets

Tools and Techniques

1. Earned value management

2. Prediction

3. Performance index required for completion

4.Performance review

5. Project management software

6. Reserve analysis

output

1. Job performance information

2. Cost forecast

3. Change request

4. Project management plan update

5. Project file update

6. Organizational process asset updates

Project cost management techniques and tools

Cost analysis techniques: analogical estimation, parametric estimation, bottom-up estimation, etc.

1. Technical analysis.

Available technologies include (but are not limited to):

(1) Payback period: It refers to the time elapsed when the future net cash flow of an investment project is equal to the original investment amount, that is, the time required for the original investment amount to be recovered through future cash flow.

(2) Return on investment: It refers to the value that should be returned through investment, that is, the economic return that an enterprise receives from an investment activity.

(3) Internal rate of return: Also known as the internal rate of return (IRR) or internal rate of return, it is the discount rate that makes the net present value of an investment project equal to zero. It actually reflects the true return of the investment project.

(4) Cash flow discount: It is to restore the expected cash flow of the enterprise in a specific future period to the current present value.

(5) Net present value (NPV): It refers to the difference between the present value of cash inflows expected to be realized by a project and the present value of cash expenditures to implement the plan.

2. Analogy estimation: This technique is often used to estimate cost values when there is insufficient project detail, such as in the early stages of a project. Analogous estimates are generally less expensive and less time-consuming, but they are also less accurate.

3. Parameter estimation: Utilize statistical relationships between historical data and other variables (such as square footage in building construction) to produce cost estimates for project work. The accuracy of parameter estimation depends on the maturity of the parameter model and the reliability of the underlying data.

4. Bottom-up estimating is a method of estimating work components. Start by making the most specific and detailed estimate of the cost of a single work package or activity; then roll up or "roll" these detailed costs up to a higher level for subsequent reporting and tracking. The accuracy of a bottom-up estimate, and the cost itself, often depends on the size and complexity of the individual activity or work package.

Cost management technology: cost summary, reserve analysis, net worth management, forecasting, etc.

5. Three-point estimate: The accuracy of activity cost estimates can be improved by taking into account the uncertainty and risk in the estimate and using three estimates to define an approximate range of activity costs:

(1) Most likely cost (CM). The cost of an activity resulting from a more realistic estimate of the work required and associated costs.

(2) The most optimistic cost (CO). The resulting cost of an activity based on its best case scenario.

(3) The most pessimistic cost (CP). The resulting cost of an activity based on its worst-case scenario. A formula is used to calculate expected cost (CE) based on the assumed distribution of activity costs over three estimate intervals. Two common formulas based on the triangular distribution and the beta distribution are as follows: Triangular distribution CE = (CO CM Cp) /3 Beta distribution CE = (CO 4 CM Cp) /6 Calculate the expected cost based on the assumed distribution of three points, and explain the uncertainty interval of the expected cost.

6. Reserve analysis: Management reserves and emergency reserves need to be distinguished.

7. Quality cost: When estimating activity costs, various assumptions about quality costs may be used.

8. Seller’s bid analysis: During the cost estimating process, it may be necessary to analyze project costs based on bids from qualified sellers.

9. Cost summary: Cost estimates are first summarized into work packages in the WBS, and then summarized from the work packages to higher levels (such as control accounts), and finally the total cost of the entire project is obtained.

10. Historical relationship: There may be some historical relationships between relevant variables that can be used for parameter estimation or analogy estimation. Based on these historical relationships, project characteristics (parameters) can be used to build mathematical models to predict the total project cost.

11. Fund limit balance: Fund expenditures should be balanced against any restrictions on project funding. If discrepancies between funding constraints and planned expenditures are discovered, the work schedule may need to be adjusted to balance the level of funding expenditures. This can be accomplished by adding mandatory dates to the project schedule.

12. Earned value analysis and forecasting techniques.

(1) Planned value PV: Is the approved budget allocated for program work. It is an approved budget prepared to complete an activity or work breakdown structure component, excluding management reserves.

(2) Completion budget BAC: The total planned value of the project.

(3) Earned value: Earned value (EV) is a measurement of work performed, expressed in terms of the budget allocated to that work. It is an approved budget for the work completed.

(4) Actual cost: Actual cost (AC) is the actual cost incurred to perform a certain work within a given period of time. It is the total cost incurred to complete the work corresponding to EV.

(5) Progress deviation: Schedule Variance (SV) is a measure of schedule performance expressed as the difference between earned value and planned value. It refers to how far ahead or behind a project is at a given point in time. Formula: SV=EV-PV. SV>0, the progress is ahead; SV<0, the progress is lagging behind.

(6) Cost deviation: Cost variance (CV) is the budget deficit or surplus at a given point in time, expressed as the difference between earned value and actual cost. Formula: CV=EV-AC. CV＞0, cost saving; CV＜0, cost overrun.

(7) Progress performance index: The Schedule Performance Index (SPI) is a measure of schedule efficiency expressed as the ratio of earned value to planned value. It reflects how efficiently the project team uses their time. SPI is equal to the ratio of EV to PV. Formula: SPI=EV/PV. SPI>1, the progress is ahead; SPI<1, the progress is lagging behind.

(8) Cost performance index: The Cost Performance Index (CPI) is a measure of the cost efficiency of budgeted resources, expressed as the ratio of earned value to actual costs. Formula: CPI=EV/AC. CPI>1, cost saving; CPI<1, cost overrun.

(9) EAC: Estimate at Completion.

EAC=AC BAC-EV The current deviation is regarded as atypical (atypical: mistakes can be corrected if they are known)

EAC=AC (BAC-EV)/CPI The current deviation is regarded as representing the typical deviation in the future (typical: make mistakes and make mistakes)

(10) VAC: Completion Variance, which is the difference between the completion budget and the completion estimate. The formula is VAC=BAC-EAC.

[Additional knowledge points]

1. The decision to make or buy needs to consider both direct and indirect costs.

2. Cost estimators should consider factors related to risk, because responses to risks require costs, and risks almost always increase costs and delay schedules. However, when making cost estimates, there is no need to consider the profitability of the project.

3. Steps of cost budgeting.

(1) Allocate the total project cost to each work package in the project work breakdown structure. The decomposition is from top to bottom, and different decomposition weights are set according to the number of occupied resources.

(2) Reallocate the cost of each work package to the activities included in the work package.

(3) Determine the time plan for each cost budget expenditure and the project cost budget plan.

Five major processes of project management

start up

planning

implement

monitor

ending

Preparation