Cost management concepts
The project cost management is to control the actual costs incurred by the project within the budget range through project cost management in the process of project implementation. if the actual cost of project construction far exceeds the approved investment budget, it is easy to cause costs to get out of control.
1. the sum of the various costs consumed in the whole process of the project is the project cost. project cost management is all about ensuring that projects are completed within an approved budget. the total life cycle cost of the product, including development costs + maintenance costs.
2. reasons for the project cost to get out of control:
(1) insufficient understanding of engineering projects
(2) the organizational system is not perfect
(3) method problems
(4) technical constraints
(5) improper demand management
3. type of cost:
(1) variable cost (variable cost): variable with production volume, workload and time
(2) fixed cost: non-recurring cost that does not change with production volume, workload and time
(3) direct cost: the cost directly attributable to a project work
(4) indirect costs: management expenses, apportionment costs, etc., from the general management fee account or several projects share the cost of the cost apportioned to the project
(5) opportunity cost: loss caused by losing opportunity due to the choice of this project
(6) sunk cost: the historical cost of past decisions, that is, the money that has been spent and wasted
4, the emergency reserve is included in a part of the cost benchmark budget, for the "known - unknown" risk, before use does not need to be approved by senior management, PM disposable; management reserve is for the purpose of management control and specially set aside the project budget, not included in the cost benchmark, but is part of the total project budget and capital needs, for the "unknown - unknown" risk, the use needs to be approved by the senior management, the use will cause the cost benchmark to change. (not in earned value calculations).
5. cost management includes 4 processes:
(1) planning cost management: write a document - cost management plan, which stipulates how to do cost management well
(2) estimated cost: estimate how much the project will cost (approximate)
(3) budgeting: accurate budgeting to form an approved cost baseline (baseline)
(4) cost control: compare cost benchmark and actual situation, conduct cost monitoring and deviation correction (benchmark change)
the following are the inputs, tools, techniques, and outputs of each process of cost management:
project cost management encompasses the process of planning, estimating, budgeting, financing, financing, managing, and controlling costs to make the project complete within the approved budget to ensure that the project is completed within the approved budget.
Control progress
the key to effective project schedule control is to monitor the actual progress of the project, compare it with the planned schedule in a timely and regular manner, and immediately take the necessary corrective measures.
controlling progress is the process of monitoring the status of project activity, updating project progress, managing schedule baseline changes to achieve the plan, and its role is to provide a way to detect deviations from the plan so that corrective and preventive actions can be taken in a timely manner to reduce risk.
what progress control focuses on:
(1) judge the current status of the project progress
(2) influence the factors that give rise to the change in progress to ensure that the change develops in a favorable direction
(3) determine whether the progress of the project has changed
(4) when the change actually occurs, it is strictly managed according to the change control process
any change to the schedule baseline must be approved by the implementation of the overall change control process, which is an integral part of the implementation of the overall change control process.
1. ITO TO CONTROL THE PROGRESS:
(1) performance review: that is, analysis of schedule deviations.
(2) schedule compression: schedule adjustment is made by using progress compression technology.
(3) schedule preparation tools: auxiliary tools, such as project management software.
(4) progress forecasting: forecasting of future situations and events based on existing information and knowledge.
2. the purpose of analyzing the schedule deviation is to analyze the impact on the follow-up work and the construction period, and to analyze it from three aspects:
(1) analyze whether the work that produces the schedule deviation is a key activity. if yes, it affects
(2) analyze whether the progress deviation is greater than the total time difference (total duration). if yes, it affects
(3) analyze whether the progress deviation is greater than the free time difference (follow-up work). if yes, it affects
3. project schedule adjustment is a continuous and reciprocating process, and the method of adjustment is:
(1) key activity adjustment method: it is possible to advance (reduce resources and costs), it is possible to lag behind (shorten the time of follow-up key activities)
(2) non-critical activity adjustment method: does not affect the total construction period (appropriate adjustment), affects the total construction period (adjustment of key activities)
(3) method of adding or subtracting work items: does not affect the total duration (local logical relationship adjustment)
(4) resource adjustment method: resource optimization
project schedule control must be tightly integrated with other change control processes and run through the project. when the actual progress of a project lags behind the planned schedule, first identify the problem, analyze the root cause of the problem, and find the appropriate solution.
Planning cost management
cost management should be planned early in the project planning phase and a basic framework for cost management processes should be established to ensure the effectiveness of the processes and the coordination between them.
1. planning cost management is the process of formulating policies, procedures and documents for planning, managing, spending and controlling costs. the role is to provide guidance and direction on how to manage project costs throughout the project.
PLAN AN ITO FOR COST MANAGEMENT:
(1) technical analysis: i.e. a strategic approach to project financing.
(2) cost management plan: it is a plan about cost management.
2. technical analysis is that when formulating a cost management plan, it may be necessary to choose a strategic approach to project financing. available technologies include:
(1) payback period: the time required for the original investment amount to be recovered through future cash flows
(2) ROI: THE ECONOMIC RETURN ON AN INVESTMENT
(3) INTERNAL RATE OF RETURN (INCLUDED RATE OF RETURN, INTERNAL RATE OF RETURN) IRR: THE DISCOUNT RATE WHEN THE NET PRESENT VALUE OF THE INVESTMENT PROJECT = 0 (REFLECTING THE REAL RETURN)
(4) cash flow discounting: restore the expected cash flow in a specific period in the future to the current present value
(5) net
Cost estimation
a cost estimate is a cost forecast made at a specific point in time based on known information. when estimating costs, it is necessary to identify and analyze alternative cost options that can be used to start and complete the project; you need to weigh alternative cost options and consider risks, such as comparing self-made costs with outsourced costs, purchase costs and leasing costs, etc., to optimize project costs.
1. estimating cost is the process of approximate estimation of the funds required to complete project activities.
the main steps of a project cost estimate:
(1) identify and analyze the constituent accounts of costs: resource requirements, ledger charts, and project resource matrix will be formed. (where to spend money)
(2) estimate the cost size of each account according to the identified project cost component accounts. (how much does it cost per place)
(3) analyze the cost estimate results, find out the various alternative costs, and coordinate the proportional relationship of various costs. (when there are multiple forms of spending money, can you find a variety of solutions to optimize the estimation of this cost) common optimization methods include duration optimization, cost optimization and resource optimization. regardless of the cost reduction estimates, the project's contingency reserves and management reserves should not be reduced.
2. ITO FOR ESTIMATED COSTS:
(1) quality cost: various assumptions about quality cost that may be used.
(2) seller bid analysis: analyze the project cost according to the bidding situation of the qualified seller.
(3) activity cost estimate: is a quantitative estimate of the cost used to complete project work. includes both direct and indirect costs. indirect costs are included in high-level activities.
(4) estimation basis: the amount and type of support information required for cost estimation.
3. in the project life cycle, the accuracy of the project estimate will gradually improve with the progress of the project. for example, a rough magnitude estimate (rom) of a project can be obtained at the startup phase with an interval of -25% to +75%,; later, as the information becomes more detailed, the interval for deterministic estimates can be narrowed to -5% to +10%.
a cost estimate is a quantitative assessment of the likely cost of the resources required to complete an activity. for cost estimates, consideration should be given to all resources that will be charged to the project, including but not limited to labor, materials, equipment, services, facilities, and some special cost categories, such as inflation subsidies, financing costs, contingency costs, etc.
Budgeting
a project budget is all the funds used for a project and is a term we are familiar with. project budgeting and cost benchmarking are two different concepts, and it is necessary to pay attention to differences and linkages in project cost management.
1. budgeting is the process of summarizing the estimated costs of all individual activities or work packages and establishing an approved cost baseline. the role is to establish cost benchmarks on which to monitor and control project performance.
the project budget includes all funds approved for the project. the cost baseline is an approved project budget that is allocated by time period, but excludes the management reserve.
2. ITO FOR BUDGETING:
(1) agreement: information on the agreement incurred at the cost of purchasing a product, service or outcome.
(2) COST SUMMARY: THE COST ESTIMATE IS SUMMARIZED TO THE WBS WORK PACKAGE, AND THEN SUMMARIZED TO A HIGHER LEVEL (CONTROL ACCOUNT), AND FINALLY THE TOTAL COST OF THE ENTIRE PROJECT IS OBTAINED.
(3) historical relationships: some historical relationships between the variables concerned that can be used for parameter estimation or analogy estimation.
(4) balance of funds limit: balance the expenditure of funds according to any restrictions on funds.
(5) cost baseline: approved project budget (excluding management reserves) that are allocated by time period. this includes both projected expenditures and projected liabilities.
(6) project funding requirements: according to the cost benchmark, determine the total capital requirements and phased capital requirements.
3. project cost budget steps:
(1) summarize the cost estimates and emergency reserves of each activity into the work package
(2) summarize work package estimates and emergency reserves to a higher level (control account)
(3) summarize each control account to form a cost baseline
(4) cost benchmark + management reserve to obtain the project budget
Control costs
to update your budget, you need to understand the actual costs up to date. supervising only the disbursement of funds, without regard to the value of the work done by those expenditures, is of little significance to the project and at best keeps the project team from exceeding the funding limit. therefore, in cost control, the relationship between the project capital expenditure and the actual work completed accordingly should be analyzed. the key to effective cost control is to manage approved cost benchmarks and their changes.
1. cost control is the process of supervising the status of the project, updating the project cost, and managing the change of the cost benchmark. the role is to detect actual deviations from the plan in order to take corrective actions and reduce risks. the unit of control costs is generally a work package. project cost control includes:
(1) influencing the factors that cause changes in the cost benchmark
(2) ensure that all change requests are processed in a timely manner
(3) manage changes when they actually occur
(4) ensure that the cost expenditure does not exceed the approved capital limit (including the stage activity limit and the total limit)
(5) supervise cost performance, identify and analyze deviations from cost benchmarks
(6) supervise work performance according to capital expenditure
(7) prevent unapproved changes in cost or resource usage reports
(8) report all approved changes and their associated costs to the relevant stakeholders
(9) try to control the expected cost overruns within an acceptable range
2. ITO TO CONTROL COSTS:
(1) earned value management: used to measure point-in-time deviation, it is a method that combines scope, schedule and resource performance to evaluate project performance and progress. see below for details.
(2) forecast: based on the project performance, the completion estimate is forecasted, and the future situation and events of the project are predicted.
(3) completion performance index: the cost performance indicator that must be achieved in the use of remaining resources is the ratio of the cost required to complete the remaining work to the remaining budget.
(4) performance review: review of over-budget and below-budget.
(5) cost forecasting: forecast data obtained from forecasts.
3. The concept of earned value management (EVM): (for measuring time-point deviation).
(1) PROGRAM VALUE (PV): THE APPROVED BUDGET FOR THE PLANNED WORK (EXCLUDING THE MANAGEMENT RESERVE), THE SUM OF THE PVS IS ALSO KNOWN AS THE PERFORMANCE MEASUREMENT BENCHMARK (PMB), ALSO KNOWN AS THE COMPLETION BUDGET (BAC).
(2) Earned Value (EV): Approved budget for completed. Commonly used to calculate the percent complete of a project.
(3) ACTUAL COST (AC): THE TOTAL COST INCURRED TO COMPLETE THE WORK WITH THE EV.
4. cost performance monitoring and review: (earned value analysis).
(1) SCHEDULE DEVIATION (SV): USED TO MEASURE WHETHER THE PROGRESS AT A CERTAIN POINT IN TIME IS AHEAD OR BEHIND. SV = EV-PV (BOTH TAKE THE TIME POINT VALUE), POSITIVE NUMBER IS AHEAD, NEGATIVE NUMBER IS BACKWARD, 0 IS NORMAL.
(2) COST DEVIATION (CV): USED TO MEASURE THE BUDGET DEFICIT OR SURPLUS AT A CERTAIN POINT IN TIME. CV = EV-AC (BOTH TAKE THE TIME POINT VALUE), POSITIVE NUMBER IS SURPLUS, NEGATIVE NUMBER IS DEFICIT, 0 IS NORMAL.
(3) Progress Performance Index (SPI): Used to measure progress efficiency. SPI = EV/PV, 1 is normal, >1 is over-planned, and <1 is backward.
(4) Cost Performance Index (CPI): Used to measure cost efficiency. CPI = EV/AC, 1 is normal, >1 is a balance, <1 is an overrun.
5. Completion estimation forecasting method: (BAC represents the project budget, EAC represents completion estimate), through the earned value analysis found that BAC has been obviously unavailable, then the EAC should be considered to predict (essentially to enable the management reserve).
(1) IT IS ASSUMED THAT THE ETC WORK WILL BE COMPLETED AT THE BUDGET UNIT PRICE. EAC=AC+(BAC-EV)
(2) IT IS ASSUMED THAT THE ETC WORK IS COMPLETED AT THE CURRENT CPI. EAC=BAC/CPI
(3) IT IS ASSUMED THAT SPI AND CPI WILL AFFECT ETC WORK AT THE SAME TIME. EAC=AC+[(BAC-EV)/(CPI+SPI)]
6. THE COMPLETION PERFORMANCE INDEX (TCPI) IS A COST PERFORMANCE INDICATOR THAT MUST BE ACHIEVED FOR THE REMAINING RESOURCES, AND IS THE RATIO OF THE COST REQUIRED TO COMPLETE THE REMAINING WORK TO THE REMAINING BUDGET.
(1) BAC-BASED TCPI = (BAC-EV)/(BAC-AC)
(2) EAC-BASED TCPI = (EAC-EV)/(EAC-AC)
NOTE: IF BAC IS AVAILABLE, USE THE FORMER, OTHERWISE, AFTER APPROVAL, USE EAC TO REPLACE BAC.
COMPLETION DEVIATION (VAC) = BAC-EAC
7. THE OBJECTS OF PERFORMANCE REVIEW INCLUDE: CHANGES IN COST PERFORMANCE OVER TIME, SITUATIONS WHERE PROGRESS ACTIVITIES OR WORK PACKAGES ARE EXCEEDED AND UNDER BUDGET, AND ESTIMATES OF FUNDS REQUIRED TO COMPLETE THE WORK. THE EVM METHOD IS GENERALLY USED FOR ANALYSIS.
(1) DEVIATION ANALYSIS. USED TO EXPLAIN THE CAUSES, EFFECTS AND CORRECTIVE ACTIONS OF CV, SV, VAC.
(2) trend analysis. review trends in project performance over time to determine whether performance is improving or deteriorating.
(3) earned value performance. compare actual progress and cost performance with performance measurement benchmarks.
project cost management is the top priority of project management and the key to the success or failure of the project. the project cost is closely related to the management process such as schedule, scope, and quality, so it should be treated comprehensively.
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