#PM Cost Management—Using Six Sigma to Look at the Outputs of the Control Costs Process


 

1. Introduction

In the last post, I organized the tools & techniques of the Control Costs Process in terms of 5 stages, each corresponding to one of the stages of the methodology of Six Sigma, or DMAIC (Define-Measure-Analyze-Improve-Control).

This is obviously not the standard PMBOK Guide approach, but I thought that organizing the stages of the Control Costs process in this way would make a little more sense out of the inputs, tools & techniques, and outputs of this process.

2. Outputs of the Control Costs Process

Here are 5 techniques of the Control Costs Process listed with the numbers assigned to them on p. 181-187 of the PMBOK® Guide. The tool listed for the Control Costs Process, Project Management Software, is one which can be used in conjunction with any of the 5 techniques and so it is not listed below in the chart.

Stage

Output

Explanation

Stage 1 Define N/A The cost performance plan represents Stage 1 of the process, but it is an input to the Control Costs process, not a tool & technique.
Stage 2 Measure Work Performance Measurements This is the output of the earned value measurement technique, expressed in terms of CV, CPI, SV, and SPI.
Stage 3 Analyze Budget Forecasts

 

This is the output of the forecasting technique, expressed in terms of the estimate at completion or EAC, or possibly a bottom-up EAC value may be calculated from the WBS.
 

Project Document Updates

 

Updates to the EAC and its variance from the BAC (budget at completion) are added to the document which contains the project cost estimates.
Organizational Process Assets Lessons learned can be updated with the causes of the variances determined by the variance analysis technique, and the corrective actions taken to reduce them.
Stage 4 Improve Change Requests Change requests can be a) corrective actions to bring current cost overruns within acceptable limits, or b) changes to the cost performance baseline itself if the budget is determined to be unrealistic.

 

Project Management Plan The cost management plan is a component of the overall project management plan, and it will include updates to the cost performance outline if it is changed due to a change request.
Stage 5 Control Change Requests Change requests can be preventive actions to bring future projected cost overruns within acceptable limits.

This concludes the analysis of the inputs, tools & techniques, and outputs of the Control Costs process as seen through the methodology of Six Sigma.

Tomorrow I will start taking a look at the 5th Edition of the PMBOK guide which is due to be published in a little over a month and seeing how it reflects the future of Project Management.

Advertisements

#PM Cost Management—A Closer Look at the Tools & Techniques of the Control Costs Process


1. Introduction

In the last post, I organized the steps of the Control Costs Process in terms of 5 stages, each corresponding to one of the stages of the methodology of Six Sigma, or DMAIC (Define-Measure-Analyze-Improve-Control). This is obviously not the standard PMBOK Guide approach, but I thought that organizing the stages of the Control Costs process in this way would make a little more sense out of the inputs, tools & techniques, and outputs of this process.

As a recap, here is a detailed description of the steps of the Control Costs Process broken down into 5 stages.

Fig. 1 Stages of the Control Costs Process

Stage

DMAIC

Control Costs Process element

Stage 1. Define The cost performance plan is where the cost management processes are defined and the criteria set forth for controlling project costs.
Stage 2 Measure Monitoring cost performance (CV, CPI) and work performance (SV, SPI) to detect variances from cost performance baseline.

Monitoring cost expenditures (AC) so that they do not exceed periodic funding requirement limits.

Stage 3 Analyze Forecasting estimate at completion (EAC) and comparing to budget at completion (BAC) based on current trends.

Using To-Complete Performance Index or (TCPI) to calculate level of cost performance that needs to be achieved to bring EAC in line with BAC by the end of the project.

Determining the factors that create changes to the cost performance baseline.

Stage 4 Improve Corrective action to bring current cost overruns within acceptable limits. These actions can result in change requests.

  • Change requests are evaluated and approved/rejected.
  • Approved changes requests are implemented.
  • Stakeholders are informed of approved changes.

Another type of change request is a change to the cost performance baseline if the current one is shown to be unrealistic. This must be approved by sponsor and stakeholders.

Stage 5 Control Preventive action to bring future costs overruns within acceptable limits—these can also result in change requests (see above under Improve).

2. Tools & Techniques of the Control Costs Process

Here are 5 techniques of the Control Costs Process listed with the numbers assigned to them on p. 181-187 of the PMBOK® Guide. The tool listed for the Control Costs Process, Project Management Software, is one which can be used in conjunction with any of the 5 techniques and so it is not listed below in the chart.

Stage

Tool or Technique

Control Costs Process element

Stage 1 Define N/A The cost performance plan represents Stage 1 of the process, but it is an input to the Control Costs process, not a tool & technique

 

Stage 2 Measure 1. Earned Value Management An input of the Control Costs process, work performance information, is used to get the earned value or EV and the actual costs or 

AC. Another input, the cost performance baseline, gives the planned value or PV. Earned value management is used to compute the cost and schedule variance (CV and SV), and/or the cost and schedule performance index (CPI and SPI).

Stage 3 Analyze 2. Performance Reviews  

This takes the variances at any particular point in the project and determines if they are beyond any of the “control limits” set in the cost performance plan that would trigger correction and/or preventive action. Trend analysis is done to see if performance is improving or deteriorating over time.

 

3. Forecasting  

Given current trends in the variances, what will be estimate at completion or EAC (actual costs incurred at end of project)? The difference between the budget at completion or BAC and the EAC is the variance at completion or VAC.

 

4. TCPI (To-Complete Performance Index)  

Based on the EAC estimated in the Forecasting technique, what will the cost performance have to be from here on out in order to have it equal to the budget at completion? If this is attainable, corrective and/or preventive actions are taken to attain the TCPI. If this is not attainable, a change request must be made to adjust the cost performance baseline.

 

5. Variance Analysis The trend analysis of variances done in the Performance Reviews technique is taken one step further. The factors which are causing the variance are analyzed and isolated, leading to suggestions for change requests.
Stage 4

Improve

N/A Corrective action to bring current cost overruns within acceptable limits represents Stage 4 of the process, but it is an output of the Control Costs process, not a tool & technique.
Stage 5

Control

N/A Preventive action to bring future cost overruns within acceptable limits represents Stage 5 of the process, but it is an output of the Control Costs process, not a tool & technique.

You can see how the Control Costs Process techniques are mainly about measuring cost and schedule variance based on a comparison between the cost performance baseline and actual work performance information. Then these variances are analyzed using various techniques and change requests may be suggested as a result. These change requests then become the outputs of the process to bring any out-of-control costs back in line.

With this in mind, reviewing the outputs of the Control Costs process in tomorrow’s post should be very easy indeed.

#PM Cost Management—A Closer Look at the Inputs to the Control Costs Process


 

1. Control Costs Process–Overview

Here are the various steps of the control costs process as listed in the PMBOK ® Guide, but let’s use the methodology of Six Sigma called DMAIC or Define-Measure-Analyze-Improve-Control, to group them logically. Six Sigma is normally used for managing quality of manufacturing processes, but the methodology can be considered analogous to the process of managing costs on a project.

Stage

DMAIC

Control Costs Process element

Stage 1. Define The cost performance plan is where the cost management processes are defined and the criteria set forth for controlling project costs.
Stage 2 Measure Monitoring cost performance (CV, CPI) and work performance (SV, SPI) to detect variances from cost performance baseline.

Monitoring cost expenditures (AC) so that they do not exceed periodic funding requirement limits.

Stage 3 Analyze Forecasting estimate at completion (EAC) and comparing to budget at completion (BAC) based on current trends.

Using To-Complete Performance Index or (TCPI) to calculate level of cost performance that needs to be achieved to bring EAC in line with BAC by the end of the project.

Determining the factors that create changes to the cost performance baseline.

Stage 4 Improve Corrective action to bring current cost overruns within acceptable limits. These actions can result in change requests.

  • Change requests are evaluated and approved/rejected.
  • Approved changes requests are implemented.
  • Stakeholders are informed of approved changes.

Another type of change request is a change to the cost performance baseline if the current one is shown to be unrealistic. This must be approved by sponsor and stakeholders.

Stage 5 Control Preventive action to bring future costs overruns within acceptable limits—these can also result in change requests (see above under Improve).

2. Inputs to Control Costs Process

The four inputs are the Cost Management Plan, which helps give the template for the control costs process in general (listed in dark red), and then it gives the cost goal and actual costs (listed in green). The Organizational Process Assets are really software and company guidelines that assist with ALL aspects of the Control Costs Process so are not given any particular color.

Input Stage Explanation
1. Project Management Plan—Cost Management Plan Stage 1

Define

Contains cost baseline, guidelines on how to measure (stage 2), analyze (stage 3), improve and control (stage 4) cost overruns.
Project Management Plan—Cost Performance Baseline Stage 2

Analyze

This gives the equivalent of the cost goal for each point in the project.
2. Project Funding Requirements  

Stage 2

Analyze

This gives the “control limit” for the costs for each funding period in the project.
3. Work Performance Information  

Stage 2

Analyze

This gives the actual costs for each point in the project.
4. Organizational Process Assets  TOOLS These are the tools with which the control costs process is carried out:  both software and company policies/procedures.

These inputs will then be used in conjunction with the tools & techniques outlined in the next post to generate all the stages of the Control Costs process.

#PM Cost Management—High-Level Overview of the Three Cost Management Processes


 

I originally was going to write an overview of the cost management process called Control Costs, but I decided to put it together with a review of the other two processes, Estimate Costs and Determine Budget, for reference.

1. Cost Management Processes Overview

Here’s a table giving a summary description of the three processes for an overview:

Figure 1. The Three Cost Management PM processes

Process

Group

Process

Number

Process
Name
Process Description
Planning 7.1 Estimate Costs Develops an approximation of the monetary resources needed to complete project activities..
7.2 Determine Budget Stage 1: Sums up the estimated costs to get the project estimate.

Stage 2: Reserves are added to get the cost baseline and the cost budget.

Stage 3: Periodic funding requirements are taken into account to get the final time-phased budget called the cost performance baseline.

Monitoring & Controlling 7.3 Control Costs Carry out the cost management plan.

Just a few words of clarification about the processes summarized in the paragraphs above.

7.1 Estimate Costs

There are two basic types of estimates: top-down (analogous and parametric) based on historical data of similar projects done in the past, and bottom-up methods (e.g., 3-point estimates) based on the WBS and risk analysis. Here are some points in distinguishing the various advantages and disadvantages top-down and bottom-up methods.

Figure 2. Comparison between Top-Down and Bottom-Up Estimates

Top-Down Bottom-Up
Time Quick Time-consuming
Range of Accuracy of Estimates Good for Rough Order of
Magnitude (ROM) Estimates

(-50%/+50% from actual costs)

Good for Budget Estimates (-10/25%)

If you add risk analysis, you can get Definitive Estimates (-5/+10%).

Project Type Best for projects similar to those done before. Best for research and development of new products.
Buy-In Good for management buy-in of project charter Good for buy-in of project team during planning

7.2 Determine Budget

The three stages I mention above are not mentioned in the PMBOK® Guide; they are my own labeling invention to make sense of the process. It was found in our study group that splitting the process into three stages made sense because it not only clarified the steps of the process, but it allowed grouping of the inputs, tools & techniques, and outputs of the process into more logical subgroups.

Stage 1

You add up all the activities to the level of the work packages, adding up all the work packages to the level of the control accounts, and then adding those up to get the final total: the project estimate, the sum of the direct costs of the project itself.

Note: There may be planning packages added if the project planning is using progressive elaboration. These are blocks of the WBS or work breakdown structure that don’t yet have a definitive estimate, usually in the later parts of the project. The project starts on the work that is detailed in the WBS for the first part of the project and which does have a definitive estimate. Then the planning packages are elaborated on and given those definitive estimates as the project gets closer to them. It’s like laying down the tracks for a train that is meanwhile coming down the tracks straight towards you.

Here’s a schematic for Stage 1 of the Estimate Costs process.

Figure 3. Stage 1 of the Estimate Costs Process

Stage 2

If there are project management costs that are not attributable to any one particular project, such as the costs of project management software tools (such as Microsoft Project), the company may decide to budget for these indirect costs by splitting them up in a specified way between the projects. If the company decides to do this, the indirect costs are added to the total direct costs, or project estimate, that was the end result of Stage 1.

Then two levels of reserves are added:

A. Contingency reserves

These are for risks accounted for in the risk register. They are added to the project estimate to get the cost baseline.

Project estimate + contingency reserves = cost baseline

Two things to note: a) contingency reserves can normally be used at the discretion of the project manager; b) the cost baseline is the basis for going on to Stage 3 of the process.

B. Management reserves

These are for unknown risks that are NOT accounted for in the risk register. They are added to the cost baseline to get the cost budget.

Cost baseline + management reserves = cost budget

Two things to note: a) management reserves, as the name implies, can normally only be used at the discretion of management, not the project manager; b) the cost budget is NOT the basis of carrying out the cost management plan, but rather the cost baseline is.

Below is a schematic that explains the process in Stage 2 of the Estimate Costs process.

Figure 4. Stage 2 of the Estimate Costs Process

Stage 3

The cost baseline is the total costs of the project plus the contingency reserves. Then the costs for the project are spread out across the schedule of the project to get the cost performance baseline. See the diagram below taken from the PMBOK® Guide.

If this amount cannot be 100% funded by the company at the beginning of the project due to cash flow constraints, then it must be funded periodically during the course of the project. In this case, the project funding requirements have to be set up at various points along the project.

The Determine Budget process is summarized graphically below.

7.3 Control Costs

Essentially the Control Costs process consists of carrying out the Cost Management Plan. Where does this come from? The planning for cost management does not take place in any of the cost management processes listed above; instead the cost management plan is created as a component of the overall project management plan in the process 4.2 Develop Project Management Plan which is part of the Integration Knowledge Area. The various elements of the Cost Management Plan are listed on my post for 10/14/2012.

Here are the various steps of the control costs process as listed in the PMBOK ® Guide, but let’s use the methodology of Six Sigma called DMAIC or Define-Measure-Analyze-Improve-Control, to group them logically. Six Sigma is normally used for managing quality of manufacturing processes, but the methodology can be considered analogous to the process of managing costs on a project.

Stage

DMAIC

Control Costs Process element

Stage 1. Define The cost performance plan is where the cost management processes are defined and the criteria set forth for controlling project costs.
Stage 2 Measure Monitoring cost performance (CV, CPI) and work performance (SV, SPI) to detect variances from cost performance baseline.

Monitoring cost expenditures (AC) so that they do not exceed periodic funding requirement limits.

Stage 3 Analyze Forecasting estimate at completion (EAC) and comparing to budget at completion (BAC) based on current trends.

Using To-Complete Performance Index or (TCPI) to calculate level of cost performance that needs to be achieved to bring EAC in line with BAC by the end of the project.

Determining the factors that create changes to the cost performance baseline.

Stage 4 Improve Corrective action to bring current cost overruns within acceptable limits. These actions can result in change requests, which are evaluated, approved/rejected, and implemented if approved.

Another type of change request is a change to the cost performance baseline if the current one is shown to be unrealistic.  

Stage 5 Control Preventive action to bring future costs overruns within acceptable limits—these can also result in change requests (see above under Improve).

In the next posts, I will go into the inputs, tools & techniques, and outputs of the Control Costs process using this five-stage description I have listed above.

#PM Cost Management—A Closer Look at the Outputs of the Determine Budget Process


1. Review: Three stages of the Determine Budget Process

The three stages of the Determine Budget Process are represented graphically below.

Fig. 1 Three Stages of the Determine Budget Process


There are three outputs from the Determine Budget Process.

1. Cost Performance Baseline

As a result of Stage 3 of the Determine Budget Process, the time-phased budget is created which shows how much of the budget is scheduled to be allocated at any point in time of the project. See diagram below, taken from Figure 7-6 in the PMBOK® Guide. T


The x-axis represents the point of time on the project schedule, and the y-axis represents the amount allocated in the budget cumulatively up to that point. For any point along the curve, the y-axis will give you the planned value or PV for that particular point in the project.  The rightmost point of the curve, at the point where the project is scheduled to end, is the Budget at Completion, or BAC.

2. Project Funding Requirements

In the above diagram, you also see the periodic funding requirements if the funding for the project is supplied in increments during the project rather than all at once at the beginning of the project. If there are such funding requirements, it is important that the project manager at any point in time on the project watches not only the actual costs versus the planned value (the point on the cost baseline curve that corresponds to that point in time on the project), but also what the periodic funding requirements are so that there the project’s costs don’t get too far “ahead of the curve”, which might cause further delays.

3. Project Document Updates

There will be updates to the following project documents:

Project Document Updates
1. Risk Register Contingency reserves
2. Cost Management Plan (part of Project Management Plan) Cost performance baseline (against which project performance will be measured and actions taken to control costs during the course of the project)
3. Project Schedule May have been altered due to funding limit reconciliation; usually results in longer schedule.

The Estimate Costs and the Determine Budget process are both in the Planning Process group. The next post will discuss this next process, which is the final cost management process, Control Costs, in the Monitoring & Controlling Process Group.

#PM Cost Management—A Closer Look at Tools & Techniques of the Determine Budget Process


1. Introduction: Three stages of the Determine Budget Process

As we discussed in the previous post, there are three stages of the determine budget process:

Stage 1: Getting the bottom-up estimate of the project by “rolling up” the estimates of the individual activities that make up each work package, and then summing up the work packages in each control account, and then summing up these control accounts to get the project estimate.

NOTE: If the only estimate of the project is a top-down estimate (analogous or parametric estimate), then this must be refined to the greatest extent possible. However, be aware that a bottom-up estimate is always going to be more accurate than a top-down estimate, so it is more preferable, albeit more time-consuming.

Stage 2. The project estimate contains all the direct costs of the project. Then the indirect costs of a project, that is, costs for project management that are shared between all projects (such as the cost of project management software, for example), are added to the direct costs. To this amount are added the contingency reserves to handle risks accounted for in the risk register. This result is the cost baseline, the one that the performance is measured against in earned value analysis during the course of the project. Then to the cost baseline are added the management reserves to handle risks NOT accounted for in the risk register. This results in the cost budget. The management reserves can be authorized only by management and not the project manager.

Stage 3. After “rolling up” the estimates to get the cost baseline, they are “rolled across” in terms of the schedule to get the final time-phased budget that is called the cost performance baseline.

The three stages are represented graphically below.


Fig. 1 Three Stages of the Determine Budget Process


2. Tools & Techniques of Determine Budget Process

I have listed the inputs to the Determine Budget process, but have organized them and color-coded them based on the scheme of the diagram above so that you can see what inputs are for which stage in the process.

 

Name of Tool or Technique

Used for …

Explanation

1.

Historical Relationships

Stage 1

If top-down estimates such as parametric or analogous estimates were used to get the project estimate, these are refined as much as possible with historical data from other projects, either from company data or published industry data. 

2.

Cost Aggregation

Stage 1

Estimates for activities are “rolled up” into estimates for work packages , control accounts and the final project estimate. This is the heart of Stage 1 of the Determine Budget Process.

3.

Expert Judgment

Stage 1

Experts could be those in the company with relevant experience on similar projects (for top-down estimates), or could be those who have experience determining the budget for previous projects (for bottom-up estimates).

 They could also be consultants or those in industry groups or professional associations that have knowledge of budgets of similar projects (for top-down estimates).

4.

Reserve Analysis

Stage 2

This establishes the contingency reserves which are added to the project estimate to get the cost baseline, and the management reserves which are added on top of that to get the cost budget.

5.

Funding Limit Reconciliation

Stage 3

The expenditures on the project for any given period (monthly, quarterly) should be reconciled with the available funding limits from the company for that period. If funds are not sufficient in any given period, the work schedule may have to be adjusted or reconciled with the funding limits available.

These tools & techniques are appropriate for the different stages of the process which are color-coded in a similar way to the diagram above.

The next post will cover the outputs to the Determine Budget Process.

 

#PM Cost Management—A Closer Look at the Inputs to the Determine Budget Process


1. Introduction

Yesterday’s post did a quick overview of the cost management process 7.1, Determine Budget, in terms of the following two stages.

Stage 1: The individual estimates for activities developed in the previous process Estimate Costs are summed up or “rolled up” to the level of work packages, control accounts, and then finally the project estimate.

Stage 2: The project estimate then adds indirect costs if that is required. Contingency reserves are then added for those risks on the risk register to get the cost baseline, which is what the performance of the project will be measured against using earned value an analysis. Management reserves are then added for those unknown risks which on not on the risk register, and this is the overall cost budget (project manager has authority to use contingency reserves; only management has authority to use management reserves).

However, there is an additional stage to the Determine Budget process:

Stage 3: Once the overall cost budget is available, then the budget has to be time-factored to account for the fact that the funding of the project may not be 100% available before the project starts, but rather may come available periodically during the course of the project. This cost restraint may cause additional time to be added to the schedule if funding for a certain portion of the project is not available by the date it was originally scheduled.

Fig. 1 Three Stages of the Determine Budget Process

Today’s post will take the inputs of the Determine Budget process and relate them to the various stages in the process referred to above.

2. Inputs to Determine Budget

I have listed the inputs to the Determine Budget process, but have organized them and color-coded them based on the scheme of the diagram above so that you can see what inputs are for which stage in the process.

Name of Input Used for … Explanation
1. Activity Cost Estimates Stage 1 Activity costs estimates are used to roll up into work packages.  (This is an output of process 7.1 Estimate Costs.) 
2. Scope Baseline (includes WBS) Stage 1 Work packages and control accounts are used to roll up into project budget.
3. Contracts Stage 1 Costs of work packages that are contracted out as procurements. 
4. Basis of Estimates Stage 2 (indirect costs) Indicates whether indirect costs are to be added after direct costs of project.  (This is an output of process 7.1 Estimate Costs.)
5. Organizational Process Assets Stage 2 (contingency reserves) Project document updates include risk register, which contains reserve analysis results from process 7.1 Estimate Costs.  (This is an output of process 7.1 Estimate Costs.)
6. Project Schedule Stage 3 Planned start and finish dates for activities, milestones, work packages, planning packages, and control accounts.
7. Resource Calendars Stage 3 Schedule of when resources are available during course of project schedule.

As you can see, some of the inputs (1, 4, and 5) come from the outputs of the cost management process 7.1 Estimate Costs, whereas the others come from the outputs of

  • scope management (input 2, Scope Baseline, comes from process 5.3 Create WBS)
  • time management (input 6, Project Schedule, comes from process 6.5 Develop Schedule)
  • human resource management (input 7, Resource Calendars, comes from process 9.2 Acquire Project Team)
  • procurements management (input 3, Contracts, comes from process 12.2 Conduct Procurements)

This shows how intricately interwoven the processes are from the different knowledge areas.

With these inputs, the Determine Budget process is conducted, which is the subject of the next post.