Cost Benefit Analysis

Cost Benefit Analysis technique is used to see the benefit we can get after investing the money. This technique can be used during initialization to check is it worth to invest by calculating the return as part of business case and or can be for improving the quality while considering the cost of quality.

For example what can be the reduction in the defect, how much of network downtime can be reduced, how much of wastage or scrapping of the raw materials can reduced etc… We know that as the quality increases the cost also increases. But in the end we need to see is it worth for the investment so as to get the benefit.

Cost Benefit Analysis technique is used under the process Plan Quality Management.

To Complete Performance Index (TCPI)

TCPI is to calculate the cost performance to be achieved in order to meet the project goals. The ratio of remaining work to be completed with remaining budget provides the TCPI.

To calculate TCPI first we need to calculate the EVM and then based on AC, EV, we can calculate TCPI. TCPI is calculated under two conditions one with original budget and the second with new budget.

TCPI=(BAC-EV)/(BAC-AC)—With planned budget

TCPI=(BAC-EV)/(EAC-AC)—With new budget

The ratio should be ideally 1. If it greater than 1, then difficult to complete and if less than 1 easier to complete.

TCPI is used as a technique under the process Control Costs.

Forecasting

Forecasting is to predict the future condition of the project by comparing the progress of the project and with what we planned. By using Forecasting technique one can arrive at three parameters namely Estimate At Completion (EAC), Estimate To Complete (ETC) and Variance At Completion (VAC).

EAC is nothing but how much money required to complete the entire project. This is as good as new BAC which is Budget At Completion.

ETC is how much more money required to complete the remaining work.

VAC is what is difference between or the variance between original budget and the new budget. This can be surplus or deficit.

Here are different formulas used to calculate EAC, ETC and VAC

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ETC=EAC-AC

VAC=BAC-EAC

There are four different variants to calculate EAC

1. EAC=BAC/CPI—This is used if the current variances or the rate of spending of money remains same

2. EAC=AC+BAC-EV—This is used if the estimation has become abnormal for the work so far it is carried out and the remaining work will continue at the same budgeted rate.

3. EAC=AC+ETC— This is used when the estimation for the remaining work no longer exists and the new estimation to be carried out for the remaining work. ETC is nothing but remaining work which can be derived using bottom up estimation.

4. EAC=AC+((BAC-EV)/SPI*CPI)—This is used considering both the schedule and cost which can influence the remaining work.

To calculate the forecasting first we need to complete the Earned Value Management where we can obtain the parameters AC, PV, EV, SV, CV, SPI and CPI.

Forecasting technique is used under the process Control Costs.

Earned Value Management

Earned Value Management is a technique used to compare the progress of the project with respect to cost and or schedule baseline. This technique is used to measure the progress at any convenient point during the project. The key parameters that are measured are Planned Value, Actual Cost and Earned Value.

Planned Value (PV) is the amount of work that should be done as on day

Earned Value (EV) is the amount of work that has been accomplished as on day

Actual Cost (AC) is the cost which is incurred as on day to accomplish the work.

Using these parameters one can calculate the variances namely schedule variance (SV) and cost variance (CV) and the performance indices Schedule Performance Index (SPI) and Cost Performance Index (CPI).

SV= EV-PV, CV=EV-AC, SPI=EV/PV and CPI=EV/AC.

Ideally SV & CV should be zero and SPI & CPI should be 1.

If SV is negative then the project behind the schedule and if SV is positive then the project is ahead of the schedule. Similarly, if SPI is less than 1, then the project behind the schedule and if SPI is greater than 1, then the project is ahead of the schedule.

If CV is negative then the project over budget and if CV is positive then the project is under the budget. Similarly, if CPI is less than 1, then the project over budget and if CPI is greater than 1, then the project is under the budget.

Earned Value Management technique is used under the process Control Costs.

Funding Limit Reconciliation

Some times in the project the sponsor might have already decided about what is the overall budget of the project. As a project manager once you determine the budget and when you compare planned budget with the budget decided or allocated, if it exceeds the allocated, then you need to re-plan may be by re-considering the scope or increase the allocated budget itself in approval with sponsor. This is called Funding Limit Reconciliation. In simple sentence it is nothing but reconciling or reworking the budget based on the limitation of the funding availability.

Funding Limit Reconciliation technique is used under the process Determine Budget.

Historical Relationship

While estimating or predicting the budget of the project one can refer the historical data and the other mathematical model which is covered through analogous and parametric estimation techniques. By calculating using these techniques the accuracy and the cost will vary and reliable on the historical information used to develop accuracy, parameters used for the quantification, scalability, complexity of the projects etc..

For example the cost for a particular resource with particular skills set is so much of dollar. Or per square feet with specific material will cost $X, etc… These parameters can be used to develop or predict the project budget.

Historical Relationship technique is used under the process Determine Budget.

Cost Aggregation

Cost Aggregation technique is used to sum of all the costs to be incurred for the entire project as part of the panning. Activities costs aggregated to work package cost. Work packages costs are aggregated to control account cost. Control accounts costs aggregated to project cost. It is similar to bottom up estimating.

Cost Aggregation technique is used under the process Determine Budget.

Vendor Bid Analysis

Vendor Bid Analysis technique is used to analyze the bidding prices received from qualified or potential sellers which in turn will be helpful for estimating the cost at the activity level and the overall budget of the project.

Vendor Bid Analysis is used under the process Estimate Costs process.

Cost of quality

Cost of quality includes the project and the product life cycle cost which are attributed because of the quality. There are two parameters under Cost of Quality. One is Cost of Conformance and second is Cost of non-conformance. Cost of conformance is to prevent the defects and cost of non- conformance is because of the defects. Cost of non-conformance is also called as cost of poor quality.

Examples for cost of conformance are training, testing, documentation, reviews, etc.. which help in preventing the defects.

Examples for cost of non-conformance are rework, wastages or scrapping of materials, warranty cost, business loss.

Cost of Quality technique is used under the processes Estimate Costs and Plan Quality Management.

Project Management Software

The tool helps in tracking the progress of the project with respect to schedule, effort and cost. The actual measurement is compared with the baselines like schedule and cost baselines. From this,variation and forecasting can be found out. This will help in recommending corrective and preventive actions.

Project Management Software tool is used under the processes Estimate Activity Resources, Estimate Costs, Control Schedule and Control Costs processes.

Performance Reviews

When the project is progressing we need to measure, compare and take or recommending necessary actions like corrective and preventive actions if the progress is not as per the expectation. Performance reviews technique helps in carrying out this activity. The outcome can be Schedule and cost variance, remaining duration left out, etc…

Performance Reviews can be carried out using Trend analysis, Critical path method, Critical chain method and Earned value management.

Performance Reviews used under the processes Control Schedule and Control Costs.