1 project cost management by sserwadda tamuzadde 0772979303 email- [email protected]
TRANSCRIPT
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Project cost management includes the processes required to ensure that the project is completed within the approved/authorised budget
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It provides an overview of the following major processes:
Resource Planning – determining what resources (people, equipment, materials, etc) and what quantities of each should be used to perform project activities.
Cost Estimating – developing an approximation (estimate) of the cost of the resources needed to complete project activities.
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Cost Budgeting – allocating the overall cost estimate to individual work items.
Cost Control – controlling changes to
the project budget.
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RESOURCE PLANNING
1. Inputs
- work breakdown structure
- Historical information
- Scope statement
- Resource pool description
- Organisational policies
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2. Tools and Techniques
- Expert judgment
- Alternatives identification
3. Output
- Resource requirements
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COST ESTIMATING
1. Inputs
- Work breakdown structure
- Resource requirements
- Resource rates
- Activity duration estimates
- Historical information
- Chart of accounts
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2. Tools and Techniques
- Analogous estimating
- Parametric modeling
- Bottom-up estimating
- Computerised tools
3. Outputs
- Cost estimates
- Supporting detail
- Cost management plan
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COST BUDGETING
1. Inputs
- Cost estimates
- Work breakdown structure
- Project schedule
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2. Tool and Techniques
- Cost estimating tools and techniques
3. Output
- Cost baseline/Budget
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COST CONTROL
1. Inputs
- Cost baseline/budget
- Performance reports
- Change requests
- Cost Management plan
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2. Tools and Techniques
- Cost change control system
- Performance measurement
- Additional planning
- Computerised tools
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3. Outputs
- Revised cost estimates
- Budget updates
- Corrective action
- Estimate At Completion (EAC)
- Lessons learned
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COST CONTROL
• Cost control is concerned with (a) influencing the factors which create changes to the cost baseline to ensure that changes are beneficial, (b) determining that the cost baseline has changed, and (c) managing the actual changes when and as they occur
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Cost Control includes:-• Monitoring cost performance to detect
variances from plan• Ensuring that all appropriate changes are
recorded accurately in the cost baseline • Preventing incorrect, inappropriate, or
unauthorised changes from being included in the cost baseline
• Informing appropriate stakeholders of authorised changes
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Cost control includes searching out for the “whys” of both positive and negative variances. It must be thoroughly integrated with the other control processes (scope change control, schedule control, quality control etc). For example, inappropriate responses to cost variances can cause quality or schedule problems or produce an unacceptable level of risk later in the project.
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PROJECT EXPENDITURE
MONITORING AND CONTROL
WBS
CODE
WBS
DESCRIP
TION
CURENT AUTHORISED/APPROVED
INCURRED COST TO DATE
COMMITTED COST TO DATE
ESTIMATED COST TO COMPLETION
ESTIMATED FINAL TOTAL COST
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What to consider when monitoring
• What to monitor?
• The Data required (indicators)?
• Sources of data required (from where?)
• Who is responsible for data collection?
• How often should the data be collected?
• How is the information to be used?
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Key Areas for Monitoring
• Time
• Cost
• Work quantity
• Work quality
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Control Reports
Top Level
Middle Level
Junior Level
Supervisory Level
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Cost Variances Table
Month Budgeted cost
Actual Cost
Budgeted Cost for Work Done
Spending Variance
Schedule Variance
Total Variance
August 225,000 275,000 200,000 50,000 25,000 75,000
September 300,000 345,000 260,000 45,000 40,000 85,000
October 365,000 415,000 310,000 50,000 55,000 105,000
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Cost Reports
• Activity Cost Report
• Cash Flow Report
• Variance Report
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Financial Reports
• Monthly Commitment and Expenditure
• Monthly cash flow forecast
• Monthly bank reconciliation statement
• Monthly outstanding payments
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Steps involved in cost control/Monitoring:-
• Prepare the budget/cost baseline
• Track down actual expenditure
• Compare actual expenditure with the budget/cost baseline
• Investigate the variances (significant ones)
• Take corrective action
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Cont
- No action to be taken
- Carry out re-allocations
- Replan/change the budget
- Terminate the project or abort.
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FINANCE/COST MONITORING Information to be collected
Sources of Information
Use of Information
Project budget and Expendit
ure
•Expenditure by project
•Expenditure by budget head
•Balance of budget remaining this year
•Regularly recurring items of expenditure, eg rent
•Previous year’s budget and expenditure
•Rates of inflation
•Exchange rates
•Invoices and vouchers
•Budget breakdown
•Analysis of budget and expenditure, eg using computer spreadsheets
•Newspapers, banks
•Predict expenditure for budgeting
•Compare costs of different projects
•Identify areas of excessive expenditure
•Identify any savings
•Compare costs with project achievements to assess cost
effectiveness
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Information to be collected
Sources of Information
Use of Information
Staff Salaries •Salaries
•Tax, insurance , etc
•Annual increments
•Final pay
•Other payments e.g health allowance, staff loans etc
•Staff records •Pay slips •Salary records
•Ensure staff are paid according to pay scale reflecting nature of job and length of service
•Ensure other payments are made according to correct procedures
•Ensure all staff know what benefits they are entitled to
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Information to be collected
Sources of Information
Use of Information
Cash flow analysis
•When is cash needed for project
•Where will cash come from (might include loan re-payments, community contributions, etc
•What and when are cash outgoings? (regular and irregular)
•Cash record system (cashbook)
To ensure sufficient but not excessive cash is available
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BUDGETING
• Definition: A plan translated in financial terms for the resource and operations of a business, organisation or project for a stated period in the future.
• Or simply a statement of incomes and expenditures.
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Budgeting
Development project managers have several major tasks to perform in respect of managing project funds. These can be summarised as follows:-
1. Determining the requirement for funds to service the needs of scheduled activities during a defined period
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2. Controlling the project through the allocation of project funds to different activities.
2. Making adjustments in the allocation of funds between activities during the planned time period.
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The advantages of the budget system can, therefore, be summarised as follows:-
1. It can be directly linked to the implementation planning exercise and therefore directly reflect the objectives of the project.
2. The organisational structure of the project is defined in terms of zones of financial responsibility under the budget.
3. Each project subsection is involved in determining its own objectives and work programme through the exercise.
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4. It stimulates communication within the project and helps to resolve conflicts.
5. It provides a basis for allocating priorities and assists with resource allocation throughout the project structure
6. It provides the basis for a monitoring and control system which can allow for speedy corrective action if required.
7. Budgeting allows management personnel to take responsibility for planning their work, setting targets and measuring their performance which can all add up to a stimulus to obtaining higher levels of achievement.
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FINANCIAL MANAGEMENT AND ACCOUNTING
While the project budget represents the implementation plan in financial terms, the actual operational aspects of handling the finance requires the development of appropriate organisational structures and systems.
Most managers of development projects are not accountants, nor need they be .
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A basic understanding of accounting, however, may be of help to managers.
All projects of any size, need an accounts section which supports three basic tasks:
1.Planning, control and
recording of transactions
2.Presentation of information
3.Financial decision-making
The information resulting from the first two tasks allows management to undertake the third.
Tasks of accounts section
Management functions
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WHY BUDGET
• To help management in the planning of annual operations.
• To co-ordinate the activities of the various parts of the organisation/project and ensure that the parts are in harmony with each other.
• To communicate plans to the various responsibility centre managers.
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• To motivate managers to strive to achieve the organisational/project goals/objectives
• To control activities (organisational or project)
• To evaluate the performance of managers
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APPROACHES TO BUDGETING
• Incremental budgeting
• Zero base budgeting (ZBB)
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TYPES OF BUDGETS
• Operating Budgets – Recurrent
• Capital Budgets – Development
• Financial Budgets (cash budgets, projected income and expenditure statement and projected balance sheet).
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CASH FLOW STATEMENT/BUDGET
• A cash budget is a detailed statement of the expected cash receipts and payments during the next period (usually a year divided into twelve months).
• The cash budget shows the expected cash position for each of the periods ahead. This enables the organisation/project to assess whether operations can continue as planned.
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Whether expenditure needs to be reduced or curtailed, whether there is the need to approach the bank for a loan or overdraft, etc.
It is important to note that cash flow for a period does not necessarily equal the profits for that period
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Cost Terms and Concepts • Cost Object • Direct and Indirect Costs • Period and Product Costs • Cost behaviour in relation to volume of activity
(fixed Vs variable costs) • Relevant and irrelevant costs• Avoidable and unavoidable costs• Sunk costs• Opportunity costs• Incremental and marginal costs
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Budgetary Expenditure Control Process:-
• Preparation of a budget
• Identification of responsibility centre
• Adoption of mutually agreed targets
• Periodic monitoring and recording of actual performance
• Careful comparison of actual with planned performance.
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• Assessment of deviations or variances and investigating their causes
• Initiation of corrective action to carry out the necessary adjustments.
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Corrective action:- Anything done to bring expected future project performance into line with the project plan•Preventing incorrect, inappropriate or unauthorised changes from being included in the cost baseline/budget•Informing appropriate stakeholders of the authorised changes•An estimate at completion (EAC). This is a forecast of total project costs based on the project performance to date.
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REASONS FOR TIME AND COST OVERRUNS
Power Shortage of power Delay in the completion of transmission
lines
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Equipment Delay in the erection of major equipment Delay in placing orders for critical
machinery Delay in the delivery of imported and/or
indigenous equipment Shortage of critical items in the advanced
stage of commissioning Shortfall in acquisition of equipment
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Delay in the finalisation of foreign/indigenous suppliers
Shortage of construction equipment Delay due to the addition of equipment
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Shortage of Inputs
Land acquisition Water for construction Technical personnel Skilled labour Construction material, e.g. cement, steelTransport bottlenecks Free supply items from users
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Designs/Scope of Work
Delay in the appointment or selection of consultants
Delay in receipt of drawingsChanges in scope due to unexpected
situations
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Labour Problems
Strikes, go-slow, etc Surplus labour
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FINANCE
Delay in sanctioning the projectDelay in release of fundsDelay in sanction and release of foreign
exchange Fluctuations in the price of foreign
exchange Delay in tying up credit/collaboration
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Delay in approval of revised cost estimate Change in rates of taxes and duties Increase in capital cost due to price
escalation
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Others
Delay in the finalisation of foreign exchange
Delay in the supply of drawingsDelay in finalising the designs/drawing Delay in finalisation of contracts –
indigenous and foreign Delay in the actual placing of orders
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Legal disputes/stay orders awaiting arbitration
Delay due to contractorsInadequate release of scarce material, i.e.
cement, steel, etcTime gap between the feasibility report and
revised cost estimatesChange in scope due to inadequate initial
investigation
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Change in scope of work due to revised requirements
Increase in the target capacity Delay in the site selection/clearanceDelay in the development of infrastructure
facilities Delay in the construction of railway
siding/railway line, etc
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Slow civil construction Delay in completion of linked projectsDelay in commissioning
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Internal Control
Internal control system – Financial and non- financial controls instituted in the organisation to ensure that the operations of the organisation run in an orderly manner. They also establish safeguards on assets and promotes efficient use of resources.
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FINANCIAL OR ACCOUNTING CONTROLS:- • Controls over cash receipts
• Controls over payments
• Controls over financing operations
• Controls over accounts receivables and payables.
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NON-FINANCIAL OR ADMINISTRATIVE
CONTROLS:-• Controls over the personnel section
• Controls over fixed assets
• Controls over laid down policies
• Controls over laid down procedures
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SOME TYPES OF INTERNAL CONTROLS
• Organisation plan
• Segregation of duties
• Physical controls
• Authorisation and approval
• Arithmetical and Accounting controls
• Competent staff
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• Supervision
• Budgeting
• Meetings
• Acknowledging Performance
• Filling System
• Serially numbering documents
• Periodic reports
• Audit function (internal) etc
Group work
• Assuming you have been appointed to head a big project on HIV/AIDS in your District.
• (a)Discuss the various ways and means you will use to monitor project costs.
• (b)What challenges do you expect to experience
• (c) For each challenge identified in(b) above recommend remedial strategies
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