Cost management cost estimates cost accounting project cash flow company cash flow direct labor cost over head cost others Cost reduction analysis Iceberg syndrome: cost of change exceeds original cost of project Possible reduction in cost Cost of change Project life cycle phases Project cost Budget, variance and earned value Variance: any schedule, technical performance or cost deviation from specific plan Used to verify budgeting and scheduling system
Budget, variance and earned value Variance measurements Measurable efforts discrete increments of work, with definable schedule for accomplishment, producing tangible results Level of efforts work that does not lend itself to subdivision in discrete schedule increment work Type of variances Budgeted cost of work schedule: BCWS is the budgeted amount of cost for work scheduled to be accomplished plus the amount or level of efforts Budgeted cost of work performed: BCWP is the budgeted amount of cost for completed work plus budgeted for level of efforts completed within given time period, (earned value) Type of variances Actual cost of work performed: ACWP :is the amount reported as actually expended in completing the work accomplished within a given period Variances Calculation Cost Variance CV = BCWP -ACWP a negative value = cost over run Schedule variance = BCWP - BCWS a negative value indicate behind schedule condition Cost variance percent = CVP = CV/BCWP Schedule variance percent = SVP = SV/BCWS Variances Calculation Cost performance index CPI = BCWP/ ACWP Schedule performance index SPI = BCWP/BCWS If CPI or SPI= 1 perfect performance CPI or SPI > 1 exceptional performance CPI or SPI <1 poor performance Variances Calculation $ Variance upper boundary Variance Lower Boundary Actual cost Variance Projected cost Phase I R & D Phase II Qualification Development Phase III Time Parameters for Variances Analysis Question Answer Acronym How much work Budgeted cost of work BCWS should be done ? scheduled How much work Budgeted cost of work BCWP is done? performed How much did the "is Actual cost of work ACWP done" work cost? performed (actuals) What was the total job Budget at completion BAC supposed to cost? (total budget) What do we now Estimate at completion EAC expect the total job or latest revised estimate LRE to cost? Calculating BCWP Major problem with Variance Analysis BUDGETED COST FOR WORK PERFORMED Methods available Use $$$ value regardless of % complete No matter how much task is completed if the project is 20% in time then 20% $ should be BCWP Calculating BCWP 50/50 Rule Half of the budget is recorded at the start of the scheduled work and half at completion Advantages Eliminate the calculation of % complete Calculating BCWP 0/100 Usually for small activities Value is earned at the end of the activity Milestone Long work / activities Value is earned at the completion of milestone. % complete Long work duration with no milestone Value earned is the reported % of the budget Calculating BCWP Cost formula (80/20) Variation of % complete for long duration work Equivalent unit Similar unit work Earnings are in completed unit not in labor Level of effort Based on passage of time Used for managers and supervisors work Value earned is based on time expanded over schedule time Measured in terms of resources consumed Analysis of Project Status Earned value is more effective if used at higher levels of tasks. Subtask 1: All contractual fund were budgeted. Cost/performance was completed on time as indicated by milestone position Subtask 2: All contractual fund were budgeted. A cost over run , as ACWP >BCWO. Milestone was completed later than schedule Also see table 15-3 Analysis of Project Status Subtask 3: Cost was under run, WHY? Subtask 4: Work not yet started Analysis of Project Status Subtask 5: Scheduled work completion but $50,000 cost overrun Subtask 6: Work has not yet started. Behind schedule Analysis of Project Status Subtask 7: 25% completed Subtask 8: Not started Analysis of Project Status Budget at Completion: Sum of all budgets (BCWS). Estimate at Completion $$$ or Hours Realistic appraisal of the work when performed Sum of all direct and indirect cost to date and the estimates of all remaining work EAC = cumulative actual + estimate to complete Analysis of Project Status Estimate at Completion Done periodically Gives the best estimate of total cost at completion Variance at Completion VAC = BAC - EAC Analysis of Project Status Formula I. EAC =(ACWP/BCWP)*BAC =(1900/1500)*(3000)=$3800. Assume constant burn rate for the remaining project Best formula, if burn rate is calculated periodically Activity % Complete BCWS BCWP ACWP A 100 1000 1000 1200 B 50 1000 500 700 C 0 1000 0 0 Analysis of Project Status Formula II EAC =(ACWP/BCWP)* work completed + Actual (or revised) and in progress cost of work packages not yet begun =(1900/1500)*(2000)+$1000=$3533. Assume, that work not yet started will complete at planned cost Activity % Complete BCWS BCWP ACWP A 100 1000 1000 1200 B 50 1000 500 700 C 0 1000 0 0 Analysis of Project Status Formula III EAC = [Actual to date] + [All remaining work to be at planned cost including remaining work in progress ]. = 1900+[500+1000]=$3400. Assume remaining work is independent of burn rate Unrealistic Activity % Complete BCWS BCWP ACWP A 100 1000 1000 1200 B 50 1000 500 700 C 0 1000 0 0 Cases for Comparing Planned Vs Actual Performance Case 1: This is the ideal planning situation where everything goes according to schedule. Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 1 800 800 800 Cases for Comparing Planned Vs Actual Performance Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 2 800 600 400 Case 2: Costs are behind schedule, and the program appears to be under-running. Work is being accomplished at less than 100 percent, since actuals exceed BCWP. This indicates that a cost overrun ran be anticipated. This situation grows even worse when we see that we are 50 percent behind schedule also. This is one of the worst possible cases.
Cases for Comparing Planned Vs Actual Performance Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 3 800 400 600 Case 3: In this case there exists good news and bad news. The good news is that we are performing the work efficiently (eff1ciency exceeds 100 percent). The bad news is that we are behind schedule.
Cases for Comparing Planned Vs Actual Performance Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 4 800 600 600 Case 4: The work is not being accomplished according to schedule (i.e., is behind schedule), but the costs are being maintained for what has been accomplished.
Cases for Comparing Planned Vs Actual Performance Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 5 800 800 600 Case 5: The costs are on target with the schedule, but the work is 25 percent behind schedule because the work is being performed at 75 percent efficiency.
Cases for Comparing Planned Vs Actual Performance Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 6 800 800 1000 Case 6: Because we are operating at 125 percent efficiency, work is ahead of schedule by 25 percent but within scheduled costs. We are performing at a more favorable position on the learning curve.
Cases for Comparing Planned Vs Actual Performance Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 7 800 1000 1000 Case 7: We are operating at 100 percent efficiency and work is being accomplished ahead of schedule. Costs are being maintained according to budget.
Cases for Comparing Planned Vs Actual Performance Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 8 800 600 800 Case 8: Work is being accomplished properly, and costs are being underrun
Cases for Comparing Planned Vs Actual Performance Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 9 800 1000 800 Case 9: Work is being accomplished properly, but costs are being overrun.
Cases for Comparing Planned Vs Actual Performance Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 10 800 1000 600 Case 10: Costs are being overrun while under-accomplishing the plan. Work is being accomplished inefficiently. This situation is very bad. Cases for Comparing Planned Vs Actual Performance Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 11 800 600 1000 Case ll: Performance is ahead of schedule, and the costs are lower than planned. This situation results in a big Christmas bonus.
Cases for Comparing Planned Vs Actual Performance Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 12 800 1200 1000 Case 12: Work is being done efficiently. and a possible cost overrun can occur. However, performance is ahead of schedule. The overall result may be either an overrun in cost or an underrun in schedule. Cases for Comparing Planned Vs Actual Performance Case Planned earned Value(BCWS) Actuals (ACWP) Actual Earned value(BCWP) 13 800 1000 1200 Ca.se 13: Although costs are greater than those budgeted, performance is ahead of schedule, and work is being accomplished very efficiently. This is also a good situation.
Summary Variance Calculated for both labor and material Find total price variance for direct labor and rate cost variance Direct Material Direct Labor Planned price/ unit $ 30.00 $ 24.30 Actual units 17,853 9,000 Actual price /unit $31.07 $26.24 Actual cost $554,630 $236,200
Summary Variance Total price variance for direct labor = Actual units * ( BCWP - ACWP ) = 17,853 * ($30.00 - $31.07) = $ 19,102.71 Labor rate cost variance = Budgeted rate - Actual rate = $24.30 - $26.24 = $ 1.94 Status Reporting Brief Contain Variance analysis Estimate at completion Cost summary Schedule summary Milestone report Event report Cost Control Problems Causes Poor estimates, resulting in unrealistic budgets Inadequate brake down of work No management policy for reporting and control Unforeseen problems, technical and non technical Schedule delays, etc. Cost Control Problems Cost over-run Causes Failure to underestimate customer requirement Underestimating Work brake down Misinterpretations of information Failure to assess and provide risk Forcing compromises etc.