Monitoring your Project

Project Cost Control

Instructor Roger de Peiza

Learning Goals
1. 2. Cost Control Earned Value Management

Agenda Cost Management Cost Budgeting Cost Control

Attendance

Agenda Cost Management Cost Budgeting Cost Control

Cost Control

Cost Control

Agenda Cost Management Cost Budgeting Cost Control

Cost control is concerned with:

Influencing the factors that create changes to the cost baseline to ensure that changes are agreed upon Determining that the cost baseline has changed Managing the actual change when and as they occur

What does Cost Control include?

Agenda Cost Management Cost Budgeting Cost Control

1. 2. 3.

Monitoring cost performance to detect and understand variances from the plan Ensuring that all appropriate changes are recorded accurately in the cost baseline Preventing incorrect, inappropriate or unauthorized changes from being included in the cost baseline Informing appropriate stakeholders of authorized changes Acting to bring expressed cost within acceptable limits

4. 5.

Cost Control Processes

Inputs
Agenda Cost Management Cost baseline

Tools and Techniques Cost change control system Performance measurement analysis Forecasting Project performance reviews Project management software Variance management

Outputs Cost estimates updates Cost baseline update Performance measurement Forecasted completion Requested changes Recommended corrected actions Organizational process assets (updates) Project management plan (updates)

Cost Budgeting Project funding requirements Cost Control Performance reports Work performance information Approved change requests Project management plan

Cost Control Input

Performance reports
Agenda Cost Management Cost Budgeting Cost Control

Performance reports provide information on project scope and cost performance.

Which task is completed and which have not been Which budget item has been met and which has not been

Performance reports may also alert the project team to issues that may cause problems in the future

Work completion
Agenda Cost Management Cost Budgeting Cost Control

In order to have effective project controls, it is imperative that the project team have accurate measurements of the work performed for each scheduled task.

If this information is not available, no one knows if there is over or under spending on the project's budget.

Examples of Work Completion Rules

Agenda Cost Management Cost Budgeting Cost Control

0/100 Rule 20/80 Rule 50/50 Rule

0/100 Rule

Agenda Cost Management Cost Budgeting Cost Control

Assume that 0 percent of the task is complete until the entire task is finished Using the 0/100 Rule requires a very conservative approach.

20/80 Rule

Agenda Cost Management Cost Budgeting Cost Control

Once the task is started, the project office assumes that 20 percent of the task is complete When the task is finished, the remaining 80 percent is added to the amount completed This method is very cautious, but is less conservative than the 0/100 Rule

50/50 Rule

Agenda Cost Management Cost Budgeting Cost Control

Probably the most popular method of showing a task's progress is the 50/50 Rule. This assumes that once the task has begun, 50 percent of the task is completed When the task is completed, the remaining 50 percent is added to the amount completed

Cost Control Input Change requests

Agenda Cost Management Cost Budgeting Cost Control

Request for changes in the scope of work May occur in many forms:
Oral or written Direct or indirect External or internally initiated Legally mandated or optional

Changes may increase or decrease the budget

Cost Control Tools

Cost Change Control System

Agenda Cost Management Cost Budgeting Cost Control

A system that defines procedures by which the cost baseline may be changed Includes:
Paperwork Tracking systems Approval levels needed for authorizing changes

Cost Control Tools Performance measurements

Agenda Cost Management Cost Budgeting Cost Control

Helps access the magnitude of any variations that do occur An important part of cost control is to
Determine what is causing the variance Decide if the variance needs corrective action

Earned Value Analysis is useful important to cost control

Break

What is Earned Value?

Agenda Cost Management Cost Budgeting Cost Control

The PMBOK defines earned value as a method of reporting project status in terms of both cost and time.

It is the Budgeted Cost of Work Performed (BCWP) regardless of the actual cost incurred.

Another definition of Earned Value?

Agenda Cost Management Cost Budgeting Cost Control

According to Dr. David Frame, the earned value approach allows the project to examine cost and schedule variances concurrently, enabling them to take a holistic view of project progress.

The 3 fundamental building blocks of the Earned Value technique

Agenda Cost Management Cost Budgeting Cost Control

PV
Planned Value or

Budget Cost of Work Scheduled (BCWS)

AC
Actual Cost or

Actual Cost of Work Performed (ACWP)

EV
Earned Value or

Budgeted Cost of Work Performed (BCWP)

Planned Value (PV)

Agenda Cost Management Cost Budgeting Cost Control

The Planned Value (PV) is the budgeted cost for the work scheduled to be completed on an activity

It is the same as the planned budget or how much was budgeted to perform a certain function

PV is also called the Budgeted Cost of Work Scheduled (BCWS)

The Cost Performance Measurement Baseline

Agenda Cost Management Cost Budgeting Cost Control

The BCWS may also be referred to as the Cost Performance Measurement Baseline. The BCWS shows budget costs relative to time and quantities for the purpose of comparison, analysis and forecasts of costs The BCWS is typically shown graphically comparing budget costs relative to time

Actual cost (AC)

Agenda Cost Management Cost Budgeting Cost Control

AC is the amount it actually costs to perform the task.

AC is also called the Actual Cost of Work Performed (ACWP).

Establishing a variance

Agenda Cost Management Cost Budgeting Cost Control

The concepts of PV and AC offer planned and actual measurements

When actual is subtracted from planned, a variance is established.

With the third element, EV or BCWP, the concept of earned value is introduced.

Earned Value (EV)

EV is the amount of money that was budgeted for the work that has been completed so far

Agenda Cost Management Cost Budgeting Cost Control

EV is also called the Budgeted Cost of Work Performed (BCWP)

Cumulative Cost Curve

Measured Period

PV
SV = EV - PV

Cost

AC
CV = EV - AC

Total project Planned Cost

EV Duration

Exercise

The Fence Part 1

Determine the PV, AC and EV

The Cost Variance

Agenda Cost Management Cost Budgeting Cost Control

To calculate the Cost Variance (EVAC) in the example above, suppose that the AC was $6,000. The EV is the value of the work to date, and the AC is the cost to perform the work. Using these figures and applying the above variance formula, there is a positive variance of $2,000.

What does this mean?

Agenda Cost Management Cost Budgeting Cost Control

The positive variance indicates a cost under-run when it is shown by itself. However, variance must take into account the schedule of the completion of the project, which at this point in time is behind schedule.

The schedule variance

Agenda Cost Management Cost Budgeting Cost Control

The schedule variance is calculated as follows:

SV = EV - PV
Therefore in our example:

SV = $8,000 - $10,000 = -$2,000

Interpreting SV

Agenda Cost Management Cost Budgeting Cost Control

One must compare the work that was planned to what was actually accomplished.

Since the project's PV was $10,000 and its earned value is now $8,000, or a completion of only 80 percent during the planned time frame, the value of the time schedule slippage is $2,000.

This variance is a negative value, therefore it implies that the project is behind schedule.

What does it all mean?

+ Cost Variance
The project is within budget but behind schedule Either the task has not started or it has started and not enough resources have been applied. The project is within budget and ahead of schedule

Schedule Variance

+
The project is over budget but ahead of schedule Money may have been spent to crash the project.

Schedule Variance

The project is over budget and behind schedule

- Cost Variance

The Interpretation
Cost Variance Schedule Variance Interpretation
The project is within budget but behind schedule
Either the task has not started or it has started and not enough resources have been applied.

+ +

The project has overrun its budget and is behind schedule. The project is ahead of schedule but is over budget.
Money was probably spent to crash the schedule

The project is within budget and ahead of schedule

The SV and CV percent

Provide an idea of how much the project is deviating from the plan.
Agenda Cost Management Cost Budgeting Cost Control

To calculate the SV and CV percent use these formulas:

SV EV  PV SV %! * 100 ! * 100 PV PV

CV EV  AC CV %! * 100 ! *100 AC EV

Cost and Schedule Performance Index

Agenda Cost Management Cost Budgeting Cost Control

Another important concept is that of Cost and Schedule Performance Index. These two formulas explain how efficiently the work has been accomplished.

The Cost Performance Index (CPI)

Agenda Cost Management Cost Budgeting Cost Control

The Cost Performance Index (CPI) is the ratio of Earned Value to Actual Cost (EV/AC).

Cost Performance Index (CPI) = EV/AC

The cumulative CPI (the sum of all individual EVs divided by the sum of all individual ACs) is widely used to forecast project cost at completion

The magnitude of a possible cost overrun

Agenda Cost Management Cost Budgeting Cost Control

To predict the magnitude of a possible cost overrun, the following formula is used:

Projected Cost At Completion = Original Cost Estimate / CPI

CPI explained

Agenda Cost Management Cost Budgeting Cost Control

Suppose the value of the work is worth $750 (EV). It cost $800 to perform the work (AC). This means that every dollar spent will provide 93.73 cents worth of work. This ratio can then be applied to project the possible costs overrun. If the original project cost estimate was $10,000, divided by the calculated CPI of .9373 = $10,669, or a possible $669 overrun.

The Schedule Performance Index (SPI)

Agenda Cost Management Cost Budgeting Cost Control

The Schedule Performance Index (SPI) is the ratio of budgeted cost work performed to budgeted cost of work scheduled (BCWP/BCWS)

Schedule Performance Index (SPI) = EV/PV

In some applications areas, the Schedule Performance Index is used to forecast the project completion date.

SPI interpreted

Agenda Cost Management Cost Budgeting Cost Control

An interpretation of the SPI is that if $500 worth of work (EV) is performed, and the value of work schedule is $400 (PV), each dollar of scheduled work generated $1.25 worth of work, or a ratio of 25.

This ratio tells us that for every day of work scheduled, the project is .25 days ahead of schedule at the point the analysis was completed.

What does CPI and SPI say about project performance

Agenda Cost Management Cost Budgeting Cost Control

If the CPI is equal to 1.0, there is perfect performance. If CPI > 1.0, means cost under run, there is exceptional performance. If CPI is < 1.0, means cost overrun, the performance is poor. This same generalization is true for the SPI.

Budgeted at Completion (BAC)

Agenda Cost Management Cost Budgeting Cost Control

Budgeted at Completion (BAC) is the sum of all the budgets (PV) allocated to the project or the project baseline, i.e. this is what the total effort of the project should cost.

Estimated at completion (EAC)

Agenda Cost Management Cost Budgeting Cost Control

The EAC [(AC/EV) X BAC] or [BAC/CPI] is defined as either the hour or dollar amount that provides a realistic appraisal of the work performed. According to Dr. Kerzner, it is the sum of all direct and indirect costs to date plus the estimate of all authorized work remaining. In other words, the EAC is what the total project is expected to cost.

3 Ways of Calculating EAC

EAC = Actuals to date plus the remaining project budget modified by a performance factor, often the CPI.

EAC = Actuals to date This approach is most often new estimate for plus a used when current variances all remaining work. are seen as typical of future
variances. This approach is most often EAC = Actuals to date used when past performance plus remaining budget. shows that the original estimating assumptions were This approach is most often fundamentally flawed, or that they are no longer relevant used when current variances are seen as atypical and the due to a change in project management team's conditions. expectation is that similar variances will not occur in the future.

The Variance at Completion (VAC)

Agenda Cost Management Cost Budgeting Cost Control

Using the EAC, the Variance at Completion (VAC) can be calculated.

VAC = BAC - EAC

The VAC provides the best estimate of the total cost at the completion of the project.

How to remember all of this Question

How much work should be done? How much work is done? How much did the work cost? What was the total job supposed to cost? What do we now expect the total job to cost

Answer
Planned Value or Budgeted cost of work scheduled Earned Value or Budgeted cost of work performed Actual Cost or Actual cost of work performed Budget at completion

Acronym
PV or BCWS

PV or BCWP

AC or ACWP

BAC

Estimate at completion or latest revised estimate

EAC

Class Exercise

Agenda Cost Management Cost Budgeting Cost Control

The Fence Part 2

Complete the rest

The Cumulative Cost Curve

Agenda Cost Management Cost Budgeting Cost Control

The Cumulative Cost Curve or S curve is another effective monitoring tool in controlling the budget This chart provides the cumulative expenditures of the project. The cost curves for the planned and actual results are graphically shown.

Cumulative Cost Curve

Measured Period

BCWS
SV = BCWP BCWS

Cost

ACWP
CV = BCWP ACWP

Total project Planned Cost

BCWP

Duration

The End

Agenda Cost Management Cost Budgeting Cost Control

Thank you